The Big Fat 401(k) Fake Out

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Target-date funds (TDFs), which make up over half of total 401(k) assets, are not following investment theory, exposing investors to excessive risk. The TDF industry is dominated by three firms, Vanguard, Fidelity and T Rowe Price, which manage 65% of the $3.5 trillion in TDFs, stifling innovation and maintaining high risk levels. Personalized target-date accounts (PTDAs) are a promising solution to the problems in TDFs, offering a blend of managed accounts with target-date glidepaths.

TDFs are by far the most popular choice of qualified default investment alternative (QDIA). There are 40 million investors in TDFs in the US. There’s a good chance you and your clients are among them.

Yet, the theory that TDFs say they follow is not being followed. It’s a “big fat fake out” designed to increase profits. The book that presents the academic theory prescribes a very safe, 80% risk-free allocation at retirement, but most TDFs are 90% risky at their target date.

Consequently, defaulted participants are in great jeopardy relative to the theory and don’t know it. The theory is very protective at retirement while TDF practice is not.