It is not the strongest of the species that survives, nor the most intelligent, but the most responsive to change. – Charles Darwin, The Origin of Species
When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity. – John F. Kennedy
I’ve written about current dangers in the economy and stock market, as have others like Ray Dalio and Jeremy Grantham. For example, John Hussman estimates potential full-cycle stock market losses of between 42% and 65%. On the inflation front, it’s ironic that the Fed is an arsonist charged with fighting inflation fires.
There will be a stock market crash that causes a recession because we are way out on a broken limb. These crises create opportunities for financial advisors who are prepared because investors will want to protect against a repeat.
This time it’s especially critical for 78 million Baby Boomers with their $84 trillion because time is not on their side. Their loss is their heirs’ loss.
One of these opportunities lies in personalized target date accounts (PTDAs), a movement that is just beginning as 401(k)Specialist has written about in Wilshire and Soteria. There are currently several PTDAs and more are on the way, but only a couple place advisors in the driver’s seat. Advisors should seek these out.
Foreword thinking advisors can and should be prepared to capitalize on the upcoming crises with a 401(k) investment that empowers participants with the ability to protect themselves, and for sponsors to protect in their Qualified Default Investment Alternative (QDIA). The growth-or-safety pendulum will shift big time to safety.
A critical advisor choice
Investment advisors can support PTDAs or become part of this solution. They’re paid more for being a part of the solution, as they should be. It takes a team to provide PTDAs. In most cases, a money manager is the quarterback, but a couple PTDAs rely on investment advisors to call the plays shown in the following:
Something for everybody in some PTDAs
PTDAs can give lots of control to plan sponsors and their 401(k) participants. Most PTDAs are designed exclusively for defaulted participants as QDIAs. This is a mistake because they rely on recordkeeper data to reveal participant wealth; this is more likely to mislead than to help because median tenure of all workers has consistently been less than five years for the past seven decades.
Plan sponsors should make the QDIA decision, and they should be given plenty of flexibility so they can tailor the choice to their workforce demographics. Personalization is the ultimate customization.
PTDAs are most beneficial for self-directed beneficiaries because they want to engage and because $1 trillion of the $3.5 trillion in TDFs is from self-directed participants. This application is not a QDIA because these participants have not defaulted. Most PTDAs are not offered to self-directed participants, which is another mistake.
In summary, advisors should seek out PTDAs that:
- Put investment advisors in the driver’s seat
- Give plan sponsors flexibility in building their QDIA
- Support self-directed participants
PTDA users have two choices that are elegant in their simplicity—(1) risk preference and (2) retirement date—which can be changed anytime. The risk preference decision identifies a glidepath and the retirement date is a point in time on that glidepath.
Glidepaths
PTDA glidepath design is critical for success and varies among providers. There is no standardized glidepath yet, but there is academic theory that should be followed. Here is an example that aims to defend against Sequence of Return Risk and to re-risk in retirement to extend the life of assets. PTDA subscribers need to closely scrutinize and understand the glidepaths they’re signing on to.
Conclusion
It was the Roman philosopher Seneca who first uttered the poignant observation, “Luck is what happens when preparation meets opportunity.” There will be a stock market crash. It will shock participants in TDFs much more than it did in 2008 because:
- Today TDFs hold $3.5 trillion while there was only $200 billion in 2008.
- Today 78 million Baby Boomers are in the Risk Zone, while they weren’t in 2008
This time there will be a clamor for safety, to protect against a future repeat. That’s the opportunity. New safe TDFs will come on the market, but advisors are not in the business of creating funds.
The opportunity for advisors is in PTDAs that are designed to make advisors the quarterbacks. The next crash will spook a stampede to newer safer PTDAs.
SEE ALSO:
• Target Date Fund Theory and Evidence
• Why a Crash Like 2008 Would Decimate Boomers in TDFs
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.