The retirement crisis is real. Most baby boomers have not saved enough. Fully 70% of baby boomers, which is 55 million people, have saved less than $300,000. But a recent SEC report on “Perspectives on Retirement Readiness” says the solution is not to increase investment risk, as has been the justification for target-date fund (TDF) risk at the target retirement date.
Rather, the solution is modifying behavior by encouraging beneficiaries to save more. Excessive risk at the target date could be the next 401(k) scandal because it can be argued that many TDFs are designed for profit rather than the benefit of participants: there’s a conflict of interest.
SEC recommendations
“Earn greater investment returns” is notably absent from the recommendations in the 11-page SEC report because savings are the key to retirement with dignity, as is protecting those savings. “Save and Protect” is a formula for success.
Inadequate savings do not warrant increased investment risk. Quite the contrary, lifetime savings need to be protected no matter how small because that’s all there is. Most of our 78 million baby boomers will spend much of this decade in the Risk Zone when investment losses can irreparably spoil the rest of life. That’s why I wrote the book Baby Boomer Investing in the Perilous Decade of the 2020s.
The following table is a summary of the SEC report. All of the recommendations are ways to increase retirement savings; investment returns are not even mentioned. It would be a shame if someone saved and saved but then lost it in the capital markets. Treasury Bill returns are just fine if you’ve saved enough. Trying to make up for inadequate savings by taking investment risk is a bad gamble.
Implications for Target Date Funds
Most target-date funds are risky at the target date with 55% in equities and 35% in risky long-term bonds, for a total of 90% at risk. The justification for this risk-taking is that people have not saved enough so they need to earn substantial investment returns. This justification doesn’t square with the SEC report.
The mission of TDFs should be to deliver accumulated contributions intact plus reasonable interest at the target retirement date. 90% in risky assets puts lifetime savings at risk. Regardless of what a beneficiary has saved, those savings are precious to those entering retirement. The world’s largest savings plan—the Federal Thrift Savings Plan (TSP)—embraces this protection mission by holding less than 30% in equities and binds at the target date, with the remaining 70% in safe short term government bonds.
Ron Surz is President of Target Date Solutions and CEO of GlidePath Wealth Management. He can be reached at Ron@TargetDateSolutions.com.