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High Risk Level in Some Target-Date Funds Could Come as a Surprise

WASHINGTON, May 20 PRNewswire-FirstCall — Although target-date funds are designed to automatically shift investors' portfolios to less risky assets as they age, the amount of equities in some funds might come as a surprise to employees nearing retirement and their employers, say experts at Watson Wyatt Worldwide, a leading global consulting firm. A portfolio heavily weighted toward equities can have a particularly profound effect on retirement savings in a down market.

"Target-date funds are attractive because they address a key challenge many employees face — investing their savings in a way that will hopefully generate the assets they need for retirement," said Mark Ruloff, director of asset allocation at Watson Wyatt. "But, with many employees not saving enough, it is important to understand that adding risk to investments does not offset this and guarantee success. An overly risky strategy could backfire. As a result, it makes sense for employers and employees to take another look at the target-date funds in their 401(k) plans and consider whether the risk profile is right for them."

Employers often favor target-date funds because they are simple for employees to use — employees need only provide an estimated retirement date to set the investment in motion. However, some target-date funds may retain more risk by allocating more investments to equities than might be optimal. For example, some funds for employees expecting to retire in 2010 still have almost 70 percent of assets in equities, according to recent Morningstar Direct research. Watson Wyatt analysis of target-date funds has shown considerable variability in asset allocations for employees in all stages of their careers. For instance, in 2006, allocations to equities for employees 10 years from retirement varied from 80 percent to 40 percent among target-date funds. Equity allocations for employees on their retirement day ranged from 65 percent to 20 percent.

"The lack of consistent philosophies in this area means that products with very similar names can have very different compositions," said Robyn Credico, national director of Watson Wyatt's defined contribution practice. "As more employers begin to automatically enroll employees who do not choose 401(k) investments in target-date funds, understanding the amount of return received for the risk grows in importance. If the funds are not appropriately matched with employees' needs, employers could see many workers delay their retirements."

When creating or selecting target-date funds, Watson Wyatt experts advise employers to take the following steps:

— Analyze the participants in the plan and their potential retirement resources. This information should be used in reviewing plan design and in selecting the appropriate investments offered and communications given to participants. — Examine how to use risk-reducing assets, such as long-duration bonds and Treasury Inflation-Protected Securities, to diversify the portfolio and to hedge interest rate risks when participants employ life annuities for their retirement distributions. Look at various types of bonds to determine which might more effectively reduce risk. — Determine how to maximize rewards through diverse investments.

More information about target-date funds can be found at http://www.watsonwyatt.com/targetdatefunds.

About Watson Wyatt Investment Consulting

Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. We are specialist investment professionals who provide coordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation and investment manager selection. Watson Wyatt Investment Consulting provides investment advice to some of the world's largest pension funds and institutional investors and has more than 450 associates in Europe, the Americas and Asia.

In the United States, investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide, Inc. Watson Wyatt Investment Consulting, Inc., is a registered investment adviser with the Securities and Exchange Commission.

About Watson Wyatt Worldwide

Watson Wyatt (NYSE, Nasdaq: WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,000 associates in 32 countries and is located on the Web at http://www.watsonwyatt.com.

SOURCE Watson Wyatt Worldwide

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