Customization is critical in retirement saving and planning, and it applies to target-date fund (TDF) investors and their chosen glide paths.
Yet The Morningstar Center for Retirement & Policy Studies found that target-date fund sponsors may expose individual investors to increased risk by not tailoring plan glide paths to their behavior.
The center reports that 58% of defined-contribution plan assets are invested in off-the-shelf TDFs, many of which are designed for participants to stay in the plan through their retirement, even in cases when they are likely to roll their money out of the plan at retirement.
This mismatch could leave participants overly exposed to equities later in their careers.
Other key findings include:
- Plan sponsors overwhelmingly select “through” glide paths, which account for 86% of TDF assets. “To” plan participants hold less equity than “through” counterparts and are exposed to less retirement risk.
- Approximately the same number of assets are left in TDFs after the target date is attained in both “to” and “through” glide paths, at 11% and 14%, respectively, suggesting individuals are unaware of their investment plans and are often defaulted into TDFs. This indicates that sponsors do not consider participants’ individual needs and preferences when selecting a “through” plan or an investment strategy.
- Plan sponsors may not be consistently considering the specific needs of their worker population when selecting a glide path as the amount of equity in TDF plans remains consistent between industries.
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So, what can be done to combat the level of glide path homogeneity “in off-the-shelf products that employers use given the heterogeneity of their workers’ needs?”
The authors make three recommendations to the Department of Labor:
- Plan sponsors and advisors should regularly consider the key assumptions in their glide paths and their actual experience with participant behavior, as the Department of Labor suggested in its guidance in 2013.
- The Department of Labor should consider if more guidance could help clarify the role that sponsors need to play, particularly in their review of and evaluation of glide paths, given the differences we see across sectors. The department could also recommend that plan sponsors consider TDFs alongside other QDIA options.
- The Department of Labor should consider promulgating additional guidance or even amending the safe harbor on the use of customized glide paths and perhaps even dynamic allocations between QDIA options based on a participant’s needs.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
Amazing on several fronts. Mstar’s TDF index is high risk. They have never before agreed with my warnings; Thank you now. The DoL got it wrong in their tips. The only demographic that all defaulted beneficiaries have in common is lack of financial sophistication. To vs through is a distinction without a difference. Better distinctions are (1) safe or risky or (2) to, through or U . the list goers on
What’s really interesting is that any plan investment fiduciary paying attention knew about this heightened level of risk exposure at the target date – at least as far back as in 2008. How many adjusted their target date investment designs? Better QDIA options exist when compared to target date funds, managed accounts and balanced funds.
See Winter 2017: https://www.psca.org/sites/psca.org/files/1714_Ldrshp_Ltr_Default_Is_Not_Mine_3.pdf
However, the industry doesn’t need more guidance or complexity or new mandates from the Department of Labor in the form of: (1) TDF’s customized for actual experience of participants taken as a group, (2) More guidance and mandates in terms of evaluation of glide paths or encouraging consideration of other QDIA options, nor (3) Additional guidance and mandates for customized glide paths and/or dynamic allocations between QDIA options based on a participant’s needs.
Hi Jack. There are carrots and sticks. As demonstrated by the plethora of excessive fee lawsuits that transformed 401(k)s, sticks work best.