The Mistake of Firing Prudence
As a fiduciary you would feel obligated to fire your target date fund (TDF) if it had failed in 9 years out of 12, as has the SMART 2010 TDF Index relative to the S&P 2010 TDF Index.
But a closer look reveals that SMART defended in down market years. You bought SMART because it follows the Safe Landing Glide Path (SLGP) that protects near the target date as shown in the following.
Most TDFs—the Industry—have the objectives of replacing pay and managing longevity risk that justify a 55% allocation to equities plus 40% in long term bonds at the target date. They also say that they follow academic theory that integrates human capital with investment capital, but that just doesn’t check out. Academic theory is very conservative as you enter retirement, as are the SMART funds. As you can see, SMART re-risks as it exits the Risk Zone in order to extend the life of assets.
The price of prudence
Being different is not imprudent. In this case it’s actually more prudent by defending in the Risk Zone. Despite this fact, lawsuits have been brought for underperformance that is easily attributable to protection. Safe TDFs have underperformed during rising stock markets, but that will change when markets stop rising following Stein’s Law that if something cannot last forever, it will end. Fortunately, these lawsuits have been lost, but at a high cost in defense. It’s a shame.
The benefit of prudence
The benefit of prudence is in defense against losses. In this case, extending the analysis period demonstrates this benefit.
By starting the performance clock in 2007 and extending it into 2025, we see that prudence actually won about half the time—10 years out of 19. Prudence wins by not losing.
The next win will manifest in the next stock market crash. For now, the 2010 fund is the first to run its course for a lifetime, and it has fared well. Next in line is the 2020 fund.
Conclusion
The $4 trillion TDF industry is homogeneous. Most TDFs are like all the other TDFs and there is an oligopoly where three firms manage 65% of the assets. Departures from uniformity violate procedural prudence. Being different is imprudent. But you can’t be better while being the same. More defensive TDFs are substantively prudent because they protect lifetime savings and they follow academic lifetime investment theory.
There will be an evolution in TDFs, most likely following the next stock market crash. Stay tuned. Substantive prudence will morph into procedural prudence. It usually does.
SEE ALSO:
• Success of the U-shaped TDF Glidepath
• Advisors Expect TDFs to be Primary Vehicle for Alternative Assets in 401(k)s
Ron Surz is president of PPCA Inc and its DBA Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), creator of Soteria SaaS, and author of the books “Fixing Target Date Funds” and "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.
Ron can be reached at Ron@TargetDateSolutions.com.
