I’ve written extensively about the need for Baby Boomers to protect their retirement savings at this critical time in their lives because most are currently in the Retirement Risk Zone spanning the 5 years before and after retirement when investment losses can ruin the rest of life. It’s not market timing—although I have serious concerns—it’s risk management. The Roaring 2020s are the Baby Boomers’ Risk Zone.
There’s another demographic bubble that will be in the Risk Zone in 20 years—in the 2040s. There are about as many Millennials as there are Boomers. They are the “Echo Boomers.” Sure, Millennials have plenty of time to protect themselves, but target date funds (TDFs) have not improved in the 17 years that they have been the preferred qualified default investment alternative (QDIA).
Baby Boomers will likely not benefit from TDF improvements, but Millennials should.
Inciting TDF improvements for Millennials
TDFs might not improve in the next 20 years if there is no outcry for improvement. The last movement for improvement was in June 2009, when the SEC and DOL held an all-day meeting to discuss reaction to the 2008 market meltdown that brought losses greater than 30% to those near retirement in TDFs.
TDF risk actually increased after that 2009 hearing, and that was a good call because it’s been the longest bull market on record. How much longer can the bull run? Think “Tired bull.” Since “it’s not broken” yet, it will probably take another 2008 crisis to incite an outcry for improvement in TDFs, but then it will be too late for Baby Boomers.
Recent efforts to improve TDFs
Earlier this year the Government Accountability Office (GAO) released its study of TDFs that tried to pass the improvement buck on to the DOL, who would have none of it. It was a disappointing study that simply rubber-stamped current practices.
More recently, the ERISA Advisory Council is currently conducting hearings on QDIAs in general and the most popular QDIA—TDFs. I’ve submitted my recommendations that I believe the Council will take seriously. Here’s my summary:
There should be a “do no harm” Hippocratic Oath for TDFs, but there definitely is not currently. In the following I summarize my recommendations for:
- A revolutionary U-shaped glidepath that is very safe at the target date and then re-risks in retirement,
- Two risk-customized benchmarks for evaluating the performance of TDFs based on the fiduciary’s risk choice, and
- Personalization that might be supported by artificial intelligence.
Conclusion
Baby Boomers are currently in the Retirement Risk Zone. But it’s not over when they pass through the Zone. They will be followed by Generation X, then Millennials and so on. Population-wise, the Millennial “Echo Boomers” are about as many as the current Boomers, so just as important.
Each generation should be aware of their risk exposure as they near retirement, and the existence of Sequence of Return Risk that could ruin the rest of their life. It’s a risk that we each take only once. Like airplane risk, the likelihood of a crash might be low, but the consequences are horrendous.
The lack of innovation in TDFs is troubling. How many generations can pass through their Risk Zone unscathed? Which generations feel lucky? It’s not just an old person’s concern. Today is the Tomorrow of Yesterday.
SEE ALSO:
• Recommendations to the ERISA Advisory Council Regarding Target Date Funds