Target-Date Fund (TDF) glide paths are different around the world for reasons I’ll explain. A recent Congressional inquiry has called into question the risk in U.S. target-date funds, raising the question “relative to what?” TDFs in other countries provide this perspective, as does the Federal Thrift Savings Plan (TSP).
At $3 trillion and growing, U.S. TDFs are the giants, but some countries have followed a totally different TDF path. The U.S. and certain parts of the world are clearly divided between safe and risky, a much more meaningful distinction than “to” or “through.”
I report on the following five countries/regions:
- Untied States
- India
- Europe
- South Africa
- Canada
This list is not exhaustive. In particular, it does not include China because TDFs in China are U.S. exports with glidepaths that follow the Big Three group discussed in the next section.
USA
There are two TDF factions in the U.S.: one safe and one risky. The risky faction is anchored by the Big Three—Vanguard, Fidelity, and T. Rowe Price —who manage 65% of US TDF assets. The other faction is anchored by the Thrift Savings Plan (TSP), which TSP manages $740 billion for 6 million people. It’s joined by the SMART TDF Index and the Office & Professional Employees International Union (OPEIU) National Retirement Savings Plan.
The TSP Group ends 70% in Safe assets at the target date, whereas the Big 3 Group ends 90% in Risky assets. We view long-term bonds as risky. Risk at the target date is the focus of the current Congressional inquiry as it was in the June 2009 joint SEC-DOL hearing on TDFs.
India
India’s TDFs are very conservative at the target retirement date. Their National Pension System (NPS) holds ₹5 trillion rupees ($70 billion US) for 12 million people and provides three options in what they entitle the “Auto” group of choices.
India’s NPS is patterned after the US TSP, including the lettering of investment choices/funds.
- E: Investments in Equity instruments
- G: Investments in Government Debt securities
- C: Investments in Corporate Bonds, i.e. debt instruments other than government debt securities
- A: Investments in Alternative Investments (like REITs, Infrastructure Investment Trusts, AIFs Cat I and II, etc.)
Beneficiaries can create portfolios of these funds in NPS’s “Active Choice” and/or they can choose TDFs in “Auto Choice.” Investors above age 50 in Active Choice have limits on their equity allocation as summarized in the following table.
| Age | 50 | 51 | 52 | 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60+ |
| Equity Limit | 75 | 72.5 | 70 | 67.5 | 65 | 62.5 | 60 | 57.5 | 55 | 52.5 | 50 |
Europe
Europe follows a “Lifecycle” approach that moves very quickly to defend in the last nine years, ending almost entirely in safe assets at the target date.
South Africa
South African glidepaths are static at 70 growth/30 income until they’re 10 years from the target date. Like the U.S. Big Three, they are 95% in risky equities and bonds throughout.
Canada
Canadian TDFs are also like the U.S. Big Three, but with a little less equity at the target retirement date—50% versus 55% in the US.
Summary
Indian and European TDFs emphasize safety near the target date, in line with the US TSP Group. South African and Canadian TDFs are like the U.S. Big Three.
There’s a difference of opinion that could represent a conflict of interest because high-risk assets earn higher fees.
The “Risky Group” wants to compensate for inadequate savings but an SEC Report, and others like it, recommend a different solution, namely modify investor behavior, encouraging greater savings. Several studies show that savings rate matters much more than investment return and that saving early in life is highly recommended
By contrast, the “Safe Group” believes that savings must be protected, especially near retirement because that’s all there is—there will be no more paychecks.
Conclusion
Procedural prudence in the US requires the selection of TDFs in the Big Three Group because they manage almost all of the assets. By contrast, procedural prudence in India and Europe argues for TSP-like risk. Can “Prudence” vary by country? The answer lies in a concept called “substantive prudence” which is doing what is best for beneficiaries.
In the rising stock markets of the past 13 years, the Risky Group has far outperformed the Safe Group, and the riskier the greater the outperformance, resulting in higher ratings. This will change when markets correct.
Ron Surz is President of Target Date Solutions and CEO of GlidePath Wealth Management. He is also the author of Baby Boomer Investing in the Perilous Decade of the 2020s. He can be reached at Ron@TargetDateSolutions.com.
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.
