• Participants have clearly voiced that they want real protection near retirement
• Current mainstream high-equity TDFs are setting up millions for shock and devastation
• After the next crash, demand will force the industry to shift: today’s safe “exceptions” (like TSP and Safe Landing) will become the new standard
• What is now substantive prudence (actual safety) will replace mere procedural prudence (just picking a popular TDF)
401(k) plan sponsors believe that their target date funds (TDFs) are just right because that’s why they chose them. But one of the most revealing aspects of the 2025 American Century Participant Retirement Survey is the disconnect between what plan sponsors believe they are offering and the expectations of plan participants. Plan sponsors should listen to their participants and consider giving them what they want, instead of taking the view that their employees are stupid.
Survey says
Think voice of client. After all, it is the participant’s money. Here is what the American Century report finds:
• 62% believe TDFs guarantee them income at retirement
• 34% think they are guaranteed not to lose money
• 45% prefer a TDF that protects against losses even if it means sacrificing returns in rising markets
• 46% find a loss of more than 10% unacceptable when they are within five years of retirement
TDF glidepaths do not even come close to addressing these beliefs, which can be viewed as what participants really want. Participants want to believe they’re getting these protections because that’s what they really want.
90% in risky assets will not deliver these protections and it’s only a matter of time before it becomes obvious.
After the crash
When (not if) the stock market crashes, TDF participants will be shocked and crushed, as they were in 2008, but this time will be different because:
- There was only $200 billion in TDFs in 2008 while there’s $4 trillion now
- Our 75 million Baby Boomers were not in the Retirement Risk Zone in 2008, but they are now. This zone spans the 5 years before and after retirement. Losses in the Risk Zone can devastate rest of life.
This time Baby Boomers will get mad and they will get their revenge. They’ve told the world they want to be safe, but they are not. They have been exposed to excessive risk.
But all TDFs are risky
Not all TDFs are risky near the target date. The world’s largest savings plan is not risky. The $1 trillion Federal Thrift Savings Plan has 7 million participants. Here’s its TDF glidepath:
And the TSP is not alone. For example, my Safe Landing Glidepath is also very safe at its target date, like the TSP, but it re-risks in retirement to extend the life of assets, forming a U-shape that has performed very well. It has won by not losing.
Conclusion
There are usually exceptions to a rule. In the case of TDFs, the exceptions are very safe for those near retirement. If participants get what they say they want, the exceptions will become the rule, and substantive prudence will become procedural prudence. Stay tuned.
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