Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
I joined the podcast Friends Talk Money for their June 2 episode titled “What’s in Your 401(k)? It’s Time to Look.” Hosts Terry Savage, Richard Eisenberg and Pam Krueger are nationally recognized financial experts. We discussed the fact that baby boomers currently invested in target date funds (TDFs) in their retirement accounts are not protected. I explained how investors nearing or in retirement who are currently defaulted into TDFs need to stop defaulting and move to safety now. Terry Savage calls this safe investment “Chicken Money” in a recent blog post (and not in a derogatory way).
Below are my thoughts on some of the key points of our conversation:
- Baby boomers near retirement in TDFs are in jeopardy because they are invested 90% in risky assets. Equities and long-term bonds are risky. This mix lost more than 30% in 2008.
- TDFs do not follow the academic theory that they say they follow. Theory is very safe near retirement but TDFs are not. On the 1970s TV show “All in the Family,” Edith Bunker wisely explains, “I want my money to relax.” Safe investments “work” best in the Retirement Risk Zone spanning the five years before and after retirement.
- TDFs ignore sequence of return risk where losses near retirement can ruin the rest of a retiree’s life.
- Although the TDF oligopoly is procedurally prudent, TDFs are not substantively prudent, because they do not protect those near retirement. Just three firms manage 70% of the $4 trillion in TDFs — Vanguard, Fidelity and T. Rowe Price — and they are all 90% risky at their target date, as are dozens of other “me too” TDFs.
- Some (very few) TDFs actually protect, including (1) the $850 billion Federal Thrift Savings Plan (TSP), (2) Retirement Plan Advisory Group’s (RPAG) low risk flexPATH, (3) Dimensional Fund Advisor’s (DFA) Target Date Retirement Income Funds, and (4) my Soteria software for personalized target date accounts (PTDAs) that tracks my Safe Landing Glidepath.
- PTDAs are the current hot topic, but you cannot manage assets for defaulted people as a Qualified Default Investment Alternative (QDIA) because defaulted participants will not talk to you (that’s why they’re in a default investment). Also, wealthy people don’t default, so designs that take more risk for the wealthy don’t work. A “Master PTDA” for all defaulted participants can serve as a QDIA. Non-defaulted — or self-directed — participants do want to engage, so PTDAs are great for them, but this is not a QDIA.
- A U-shaped glidepath protects against Sequence of Return Risk and extends the life of assets in retirement. It falls under both the “To” and the “Through” classifications of TDF.
- The past 16 years have been the longest bull market, so TDFs have not broken, yet. The next crash will reveal the need for repairs.
- In the crash of 2008, TDFs lost more than 30%, but the harm was small because only $200 billion was invested in such products and baby boomers were not yet in the Retirement Risk Zone. Now, 75 million baby boomers are in the Risk Zone and $4 trillion is invested in TDFs. This time, the harm will be 20 times what it was in 2008, in terms of both money and damage to investors’ lives.
