A U-shaped target date fund (TDF) glidepath has received attention, but the only implementation so far is the SMART TDF Indexes provided provided by my company Target Date Solutions and available on Morningstar Direct dating back to 2007. SMART index performance is “live” with $20 million invested through July of 2024, when the client decided to move to a typical mainstream TDF—alas.
The SMART Safe Landing Glidepath is very safe at its target date in order to protect against Sequence of Return Risk. SMART is a normative index—the way things should be—unlike the other TDF indexes that are common practice aggregations of all TDFs.
SMART safe landing connects hand-in-glove at retirement to Kitces and Pfau’s Reducing Retirement Risk with a Rising Equity Glide-Path that makes a very persuasive case for entering retirement with low risk and then re-risking in retirement, creating a U-shape. We all pass through 3 stages of investing where the second stage of transitioning from working life to retirement should be very safely invested.
The typical TDF cannot re-risk in retirement because it is already very risky at its target date. U-shape requires safety at the target date. Here’s how the SMART U-shape compares to the standard SMART “To” glidepath and to the S&P TDF Index that is an industry practice index. Note that the S&P TDF Index of industry practice enters retirement at high risk with 50% in equities and 40% in long-term bonds. Note also that the U-shape is both “To” (reaching its lowest risk at target date) and “Through” (serving for lifetime).
The results
SMART Index performance is updated monthly. The 2010 fund is the first to transition through the Risk Zone and into retirement. The results are “live” through July 2024 and then use real asset class performance applied to allocations along the glidepaths shown above. The U-shaped 2010 TDF has performed very well, as shown in the following.
Hooray for U-shaped!
The U-shaped glidepath has delivered 12% more wealth than the Index so far, and with controlled risk, especially for those near retirement in 2008 who did not suffer the losses experienced by other TDFs. The U-shaped path is safer than the typical TDF path when Sequence of Return Risk threatens.
U-shaped re-risking in retirement is reflected in increasing standard deviation of returns through time:
For the rest of its lifetime, the U-shaped 2010 path will remain at the same risk as the index. Its risk journey is complete.
Personalization is the other innovation
Personalization is also worthy of consideration because investing is personal, but it’s important to recognize the difference between risk capacity and risk tolerance. Sound personalization requires an assessment of risk tolerance. Rich people with high risk capacity want to stay rich; they have low risk tolerance. Poor people with low risk capacity want to become rich; they have high risk tolerance.
Competing in an oligopolistic industry
The TDF industry is dominated by just three firms that manage two-thirds of the $4 trillion investment. Those who want to compete against the TDF oligopoly need to do something big and better, like adopting a U-shaped glidepath that has low risk at the target date. Pressure for this move will follow the next stock market crash.
The outcry for safety following the 2008 crash was ignored but there was only $200 billion back then; now there’s $4 trillion, plus 75 million Baby Boomers are now in their Retirement Risk Zone. Participants need a Safe Landing Glidepaths. Surveys say they know and want this safety.
To get the biggest benefit, participants personally manage their own unique lifepaths, moving at will among low, middle and high risk along a suite of U-shaped glidepaths.
In this decade Baby Boomers are in the Retirement Risk Zone during which a crash could ruin the rest of life. Boomers in TDFs are in the 2020 and 2030 funds, both of which are typically not safe with 50% in equities and 40% in long-term bonds. By contrast, the U-Shape at 80% safe protects them against Sequence of Return Risk now and eases them back into higher expected returns as they leave the Risk Zone. It’s good to note that the Federal Thrift Savings Plan (TSP)—the largest thrift savings plan with $1 trillion—is 70% in the government guaranteed G fund at its target date.
Conclusion
TDFs for retirement savings investing were launched in 2006 with the passage of the Pension Protection Act. Not much has changed in the ensuing 19 years. It’s time for improvements.
There are only a couple TDF innovations currently under consideration: a U-shape and personalization. The early results for U-shaped are now in, and they are very promising. Of course, the next 20 years won’t be like the last 20, but there are persuasive reasons to actually implement, like landing safely in the transition from working life to retirement. The 2020 SMART Index is now re-risking 5 years into its post-retirement path.
The past 15 years have been the longest bull market. Investors have become lulled into a sense of permanence—believing downturns are no longer part of the investment landscape. That mindset leaves portfolios—including typical TDFs—exposed when a crash inevitably returns, pursuant to Stein’s Law that if Something Cannot Go on Forever, It Will Stop.
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