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Baby boomers, who make up a significant portion of the U.S. population and control a large portion of its wealth, want their retirement savings protected. Many boomers are invested in target-date funds (TDFs) that are not safe and do not provide the protection they desire. Baby boomers may take legal action and demand restitution from their employers if they discover they are not adequately protected in their TDFs. For baby boomers, the “long run” is short. They might never recover from the next stock market crash.
At 76 million strong with $70 trillion in assets, baby boomers are a formidable force. According to this article:
The baby boomers don’t just dominate the financial industry. If we continue to ignore their very clear preferences for financing retirement—they will be the facilitators of whatever and whomever replaces us. They have the power….
76 million baby boomers, together with their children and aging parents represent more than a third of the U.S. population. They own half the nation’s wealth and do 70% of its consumer spending.
Do not make baby boomers angry.
The financial journey of boomers has been good so far, but that is likely to change at the worst possible time – in the retirement “risk zone.” Losses sustained in the risk zone, spanning the five years before and after retirement, can irrevocably spoil the remainder of one’s life.
Most boomers will spend this decade in the risk zone. There are lots of reasons to believe that they will not make it through without a major stock market correction. Importantly, boomers in TDFs will not be protected from losses, although most think they are.
Baby boomers have spoken: they want protection
Surveys of 401(k) participants reveal that they want their lifetime savings to be protected at this critical time in their lives, but the most popular 401(k) investment does not provide this protection. TDFs – with $3.5 trillion and growing – are not safe at their target date. They are 90% risky with 55% equities plus 35% in risky long-term bonds, a mix that lost more than 30% in 2008.
Astonishingly, TDF participants do not know that they are exposed to high risk as they approach retirement. They should know, but they don’t because they trust their plan sponsors to protect them. Baby boomers will be angry when they find out that they are not protected. This will not bode well for TDF providers or plan sponsors.
Boomers know they need protection and have asked for it, but they’re not getting it. They will get their revenge, and maybe even get some of their losses back in excessive-risk lawsuits and demands for restitution from their employers.
Boomers will transform the TDF industry from “risk on” to “safe at the target date” by moving out of current TDFs into newer innovative approaches like personalized target date accounts that offer better protection. They will close the barn door on risky TDFs.
Most TDFs are risky, but some are safe
In my article, Theory And Evidence In 401(K) Default Investments, I explained that most TDFs do not follow the academic theory that they say they do. At their target date, they are far riskier than theory suggests. Consequently, most TDFs have failed to protect in market declines, as shown in the following picture.
In their short 15-year history, the safety of TDFs has been tested only twice, and they have failed both times. The next test may be the toughest.
The few TDFs that follow academic theory have defended, and will defend again, but they are not widely used. They're like the safe automobiles that transformed the auto industry of the 1960s.
A lesson from the 1960s auto industry
We’ve seen what happens to companies that ignore consumer preference for safety. The Big Three auto manufacturers of the 1960s suffered a 50% loss of market share because their muscle cars were unsafe, leading to serious injuries when they crashed.
The following table from this article summarized the similarities between the 1960s auto industry and today’s TDF industry.
The “indomitable Big Three” TDF fund companies (Vanguard, Fidelity and T Rowe Price) will not remain on top.
Conclusion
Budha said, “Impermanence is eternal.” The world is always changing. The unwillingness to protect baby boomers in their TDFs will prove disastrous to baby boomers and to the companies that manage their TDFs. It’s a shame that pain will be the catalyst for revitalization.
TDF providers will re-learn the lessons of the 1960s auto industry. There will be crashes with serious injuries that elicit the wrath of the baby boomers.
As I’ve warned before, if you’re near retirement and invested in a TDF, get out now and move to the safety of Treasury bills and intermediate TIPS. Stay there while you’re in the risk zone.
Be safe rather than sorry because it matters for the rest of your life. We each journey through the Risk Zone only once. 76 million baby boomers are currently making this journey.
Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show.
His passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, Baby Boomer Investing in the Perilous 2020s, and he provides a financial educational curriculum.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
