On May 6, 2021, Senator Patty Murray, D-Wash., Chair of the Health, Education, Labor, and Pensions (HELP) Committee, and Rep. Robert C. “Bobby” Scott, D-Va.), Chair of the House Education and Labor Committee, sent a letter to Gene Dodaro, Comptroller the GAO. They are seeking answers to 10 questions dealing with concerns that some aspects of TDFs may be placing American retirement savers at risk. They wrote:
“…we write to request the General Accountability Office (GAO) conduct a review of target-date funds (TDFs). The employer-provided retirement system must effectively serve its participants and retirees, and we are concerned certain aspects of TDFs may be placing them at risk.”
Four of the 10 questions examine current practices, like percentages of plans using TDFs, fees, custom or off-the-shelf, and the use of alternatives like hedge funds. The other questions are primarily about risk near the target retirement date:
- Two questions address risk near the target date. How is risk mitigated and can it withstand market turbulence.
- What is the asset allocation through time? This is a glide path question.
- How has the Department of Labor guided TDF selection? This is a standards question.
- How are TDFs marketed and advertised?
- What are the goals?
I address these five questions in this article. Senator Murray and Representative Scott want to know if beneficiaries near retirement are being protected. They single out the Federal Thrift Savings Plan (TSP) as an example of a plan that has defended well in market turbulence. With six million beneficiaries and $800 billion in assets, the TSP is the largest defined contribution plan in the world. And as a Federal plan, Congress should at least consider the TSP target-date funds, called “L Funds.”
Two Distinct Groups of TDFs
There are two distinct groups of TDFs. One group is very conservative at the target date and the other group is substantially more aggressive. They disagree for reasons I explain. The conservative group is anchored by TSP and has members like the SMART TDF Index and the Office and Professional Employees International Union (OPEIU). The TSP group has $200 billion in TDF assets.
The other group is anchored by the Big 3 TDF providers – Vanguard, Fidelity, and T Rowe Price – who collectively manage $1.5 trillion in TDF assets.
In the following, I address the five questions listed above
How is risk mitigated?
As shown in the following graph, the TSP group has defended in the COVID crisis and in the 2008 market collapse. By contrast, the Big3 group lost 20% in the COVID crisis and 30% in 2008.
Big3 TDFs cannot and have not withstood major stock market turbulence, but the TSP group can and has. The answer to the next question explains why.
What is the asset allocation through time?
The following picture shows glide paths and contrasts them to surveys of beneficiaries and advisors by PIMCO and Mass Mutual. These surveys report a strong preference for conservatism near the target date, in line with the TSP group.
There is a clear difference of opinion that pertains to the next question.
Standards
The DOL has issued certain tips for TDFs but it has left it to the industry to establish standards. There are trade-offs throughout TDF glidepaths of growth versus safety. There is clear agreement at long dates for young employees that growth is the appropriate emphasis, but there is substantial disagreement at the target retirement date.
DOL guidance says TDFs should be chosen based on the demographics of the workforce. This guidance should more appropriately be directed to the demographics of defaulted beneficiaries since most TDF assets are those of defaulted participants. These beneficiaries have only one demographic in common: they are all financially illiterate. It is the belief of the TSP group that these naïve beneficiaries need protection so the risk of loss should be exceptionally low near the target date. Retirement researchers define a “Risk Zone” spanning the 5-10 years before and after retirement. Losses in this zone can spoil the remainder of life, even if markets subsequently recover. The TSP group believes that safety is paramount at the target retirement date. This is their standard.
By contrast, the Big3 group believes that people have not saved enough and they’re living longer so they need to earn more on their investments. More on this in the “goals” section below. As we approach retirement the reality is that whatever we’ve saved has to be “enough” because that’s all there is; paychecks stop. We make plans to make “enough” last a lifetime. Losing a significant part of “enough” is life-altering. The Big3 standard is to compensate for inadequate savings with investment returns.
How are TDFs marketed and advertised?
TDFs are marketed as one-size-fits-all-set-it-and-forget-it Qualified Default Investment Alternatives (QDIAs). They are the most popular choice of default investments because most plans use TDFs, and they seem so simple. TDFs are not marketed to participants. They’re sold to plan sponsors and their consultants, with goals discussed in the next section.
Goals
The Big3 group advertises goals of replacing pay and managing longevity risk. These are goals best achieved with adequate savings.
By contrast, the TSP group’s goal is to deliver at retirement accumulated savings plus reasonable growth. This goal acknowledges their lack of control over savings.
Participant choice
The letter to the GAO requests information on participant choices and participant awareness. In most cases, participants do not choose a TDF. They default to the fund selected by their employer. Of course, the employer is a fiduciary charged with knowing all pertinent facts, especially regarding risk.
But a plan could offer TDF choices to non-defaulted participants. For example, the OPEIU plan offers participants a choice of conservative, moderate, or growth glidepaths. The conservative path is the default.
Conclusion
It will be interesting to see what the GAO does and if it responds at all. We can hope that their report will help fiduciaries make better decisions. There is much more at stake today than in 2008 — $2.5 trillion today versus $250 billion then. Congress did not act following the joint SEC-DOL hearings on TDFs in June 2009 and they might not in this case. The intention is to allow fiduciary choice, rather than mandate an approach. We can hope that the GAO report will enlighten fiduciaries who will better protect beneficiaries. After all, the best fiduciary protection is beneficiary protection.
Ron Surz is President of Target Date Solutions and CEO of GlidePath Wealth Management. He is also the author of Baby Boomer Investing in the Perilous Decade of the 2020s. He can be reached at Ron@TargetDateSolutions.com.
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.
