Personalized Target Date Accounts for Your 401k Plan

Because they are the most popular Qualified Default Investment Alternative (QDIA), target date funds (TDFs) are the fastest growing investment in 401k defined contribution pension plans at $3.5 trillion.

But TDFs have begun to unravel in the current economy, so providers of managed accounts have stepped up their marketing efforts. Managed accounts are the second most popular choice of QDIA.

But before you switch to a managed account you should consider an emerging disruptive innovation that combines managed accounts with TDFs, providing the better characteristics of both. We call this innovation “Personalized Target Date Accounts” (PTDAs).

Introducing Personalized Target Date Accounts

TDFs are popular because they’re simple one-size-fits-all, set-it-and-forget-it approaches, but one-size-fits-all causes them to be bad fits for many, so the industry has sought solutions to this problem.

One promising solution is personalized target date accounts (PTDAs) that blend managed accounts with target date glidepaths, where several glidepaths are provided from which non-defaulted participants can choose. Non-defaulted participants are provided guidance in this selection through education and a managed account construct. They can move to any combination of glidepaths at any time.

The QDIA remains one-size., but approximately one-third of the assets in TDFs are from non-defaulted participants.

It’s all about the glidepaths

TDFs have disappointed in 2022 because they are surprisingly risky at their target date, losing more than 17% through September, but some glidepaths are much less risky so they have lost only 5% for people near retirement in 2020-dated funds.

The explanation for the recent disappointment is the asset allocation at the target date.

Most TDFs are about 85% risky at the target date with 50-55% in equities and 30-40% in risky long-term bonds. By contrast some TDFs are safe, with less than 30% in risky assets including:

The Federal Thrift Savings Plan (TSP), the largest savings plan in the world
The Office and Professional Employees International Union (OPEIU), one of the largest AFL-CIO unions
The SMART Target Date Fund Index, A normative index for safe TDFs

This safe glidepath is recommended as the default (QDIA) in PTDAs.

After the Target Date: Retirement Glidepath

401k participants want to approach retirement with savings protected, but because safe assets currently earn low returns, they’ll want to re-risk in retirement. An optimal post-retirement glidepath is provided by the research of Dr. Wade Pfau and Michael Kitces in their Reducing Retirement Risk with a Rising Equity Glide Path.

Pfau and Kitces find that the optimal glidepath in retirement starts at 10-20% in equities and re-risks during the ensuing 30 years to 40-50% equities. The safe starting point defends against Sequence of Return Risk and the re-risking extends the life of assets, increasing the odds of lasting a lifetime.

Beginning retirement at 10-20% equities requires ending our working life at 10-20%. This leads to a U-shaped glidepath like the patented path shown in the following graph.

Conclusion: Benefits of PTDAs

Personalized target date accounts are a disruptive innovation that replace TDFs and managed accounts by providing the following benefits:

Monthly allocations remove the 5- or 10-year cohort limitation. Very precise.
The patented Safe Landing Glide Path actually manages Sequence of Return Risk.
Non-defaulted participants can move to any risk level anytime.
Any retirement date can be specified.
Limits risk preference with risk capacity (age).
Can (should?) be cheaper than the average TDF’s 50 bps.
Participants could get a birthday wish advising them that their risk has been adjusted downward—feel protected and loved. Good time to encourage savings.
Big first mover benefits, especially in the current economic climate.
Risk focused, rather than performance.
Solves the one-size-fits-all problem.

Ron Surz is President of Target Date Solutions, a DBA of PPCA inc. He is also the author of Baby Boomer Investing in the Perilous Decade of the 2020s. He can be reached at Ron@TargetDateSolutions.com.

• The Unraveling of Flawed Target Date Funds Begins

Ron Surz

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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.