“Everyone has a plan until they get punched in the mouth.” – Mike Tyson
401(k) fiduciaries choose the risk for defaulted participants. In doing so they have unwittingly stepped over a bright red line into excessive risk that jeopardizes the lifetime savings of defaulted participants who are currently near retirement.
Fiduciaries want to believe that they have not breached their Duty of Care. The fact is they have been lucky because the 13 years from 2009 to 2021 have been extraordinarily kind to investors. Risk has been handsomely rewarded, but it’s the nature of risk to periodically punch investors in the mouth.
These “good times” will not last. There are lots of reasons to be concerned about imminent stock and bond market crashes. Market timing is not the issue—risk management is the issue. Retirement researchers have documented the necessity to protect investments in the Risk Zone spanning the 5 years before and after retirement because Sequence of Return Risk can devastate standard of living in retirement. We each get only one passage through the Risk Zone—no do-overs. 75 million Baby Boomers are currently in the Risk Zone, and most will remain there for this decade.
The next market crash will expose fiduciaries to lawsuits for excessive risk in default investments. Throwing a dart at the dartboard of “Qualified” Default Investment Alternatives (QDIAs) doesn’t fulfill the fiduciary Duty of Care that is like our responsibility to protect our children from possible harm. Where there’s harm, there’s a foul. “Good heart but empty head” is not a defense, nor is procedural prudence. Excessive fees were procedurally prudent until successful lawsuits changed that. Substantive prudence rules.
Even if lawsuits aren’t filed, employee morale will be crushed, and employers will be blamed. As we learned in 2008, many defaulted participants think they are guaranteed against loss as they near retirement.
In “Against the Gods: The Remarkable Story of Risk” Peter Bernstein explores the many facets of risk; getting punched in the mouth is always a surprise that can come from many sources. Similarly, I’ve written extensively about the aspects of the current fiduciary breach and think it’s time to assemble these writings into a single overarching article, so this article is an anthology of my publications that argue for serious change in the most popular QDIA, namely target date funds (TDFs).
At $3.5 trillion and growing, TDFs are more than half of all 401(k) assets. Similar concerns apply to managed accounts—the second most popular QDIA—with their reliance on the ubiquitous 60/40 stock/bond rule.
TDFs should be safer at their target date: An Anthology
Here are some of my articles on the aspects of the breach of the fiduciary duty of care in TDFs. Please choose aspects of interest to you and read the article.
Elucidations is my favorite article. As the title suggests, it informs the reader about aspects of TDFs that are generally not well understood. TDFs are not vetted. An oligopoly has emerged from the preference to select a plan’s bundled service provider.
Excessive risk near the target date
- Unprotected documents that most TDFs are more than 85% risky at their target date. Did you know that?
- Sequence of Return Risk explains the harm that could befall in the next market crash, a well-documented risk.
- Who Suffers Most identifies the most vulnerable beneficiaries.
- Retirement With Dignity is best achieved with “Save and Protect.”
- Prudence Scores rank TDFs by prudence rather than performance. From 2009 to 2021 the most imprudent TDFs have the best performance.
Threat of lawsuits
- New Door describes the imminent opportunity for the plaintiff’s bar.
- Hypocrites or Confused tries to understand why fiduciaries are breaching their Duty of Care. There’s a difference between Procedural Prudence and Substantive Prudence.
- Bad $3 Trillion Gamble warns fiduciaries Government Accountability Office (GAO) study of TDF risk. The $800 billion Federal Thrift Savings Plan’s (TSP) TDF is very safe at the target date. GAO employees participate in the TSP. This report is expected in 2023.
- Congressional Request reports what two Congressional chairs have requested.
- Recommendations advises that regulators require risk disclosures in TDF names.
The danger of safety
Why are fiduciaries choosing growth (risk) over safety for defaulted participants near retirement? “Stocks for the long run” is a likely cause. Since the stock market is up most of the time, defensive TDFs lose the performance horserace most of the time. Recent lawsuits accuse Blackrock’s TDFs of underperformance, but this was caused by being a little more conservative because they are a “To” fund, defined as having its lowest equity allocation at the target date.
Blackrock is in court because their TDFs are a little safer, with about 75% in risky assets at the target date rather than the 85% of competitors. The good news is that Blackrock is winning, but real safety—like only 30% risky at the target date—might not win.
This is where substantive prudence comes in. Should fiduciaries do what is best for participants or what is more likely to avoid lawsuits, namely procedural prudence? Like excessive fees, it will take lawsuits to turn the preference toward substantive prudence. Significant losses open the door for excessive risk lawsuits.
Conclusion
Thinking differently engenders risk of the Wildebeest who strays from the herd, but it is a requirement for evolution.
There is general agreement that retirement savers should move toward safety as they near retirement. So, ask yourself if it’s safe to be more than 85% in risky assets near retirement. A few TDFs are much safer with less than 30% in risky assets, a big difference.
Ron Surz is CEO of Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), and author of the book "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates baby boomers on the risks and rewards in contemporary investing, and Ron’s book is a tour of these shows. He can be reached at Ron@TargetDateSolutions.com.
