I just attended a webcast entitled, “Target Date Funds Continue to Evolve,” and was surprised and perplexed that “experts” continue to talk about things that simply don’t matter, and that haven’t evolved at all, but their evolution doesn’t matter because those things don’t matter.
What surprises and perplexes me even more is the Government Accountability Office TDF study that says absolutely nothing that matters. The most disappointing thing about this study is that the authors did not report on risk, as they were supposed to do.
In the following, I discuss what I think matters, and hope you agree.
Why Baby Boomers
I’ve singled out Baby Boomers for this article for the following reasons:
- Most of our 78 million Baby Boomers are currently in the Retirement Risk Zone when investment losses can devastate the rest of life due to Sequence of Return Risk. It’s very important that they protect lifetime savings at this time.
- Many Baby Boomers are in TDFs, most of which are very risky for them. Most Baby Boomers in TDFs think they’re safe, but they definitely are not.
- Baby Boomers dominate the economy. They are very important. Financial harm to Baby Boomers will harm most of us because their heirs will lose, and they will strain social support programs. Also, Baby Boomers will get angry, and then they’ll get even.
Let’s start with what matters and why, and then discuss what doesn’t matter even though it is what is commonly discussed.
What matters most
More than 100,000 people have recently read my TDF articles that warn about excessive risk at the target date. Most Baby Boomers are near retirement, so they’re near their TDF’s target date. As shown in the following, Baby Boomers in TDFs are taking very high risk, much higher than they think they’re taking.
As you can see, the main TDF providers are very risky, but a few are safe. Importantly, most TDFs say they follow academic lifetime investment theory, but they don’t – except the few safe TDFs. The theory is very safe at the target date. The TDF industry is not safe.
Excessive risk is the most important TDF characteristic that Baby Boomers need to be aware of. And now that they know, they need to get out, before the next stock market crash.
There are a few things that matter a little, in addition to excessive risk.
Things that matter somewhat
- The TDF industry is an oligopoly, dominated by just a few firms. Consequently, TDFs are not vetted because procedural prudence favors the most popular. Importantly, this means that safe TDFs are rarely even considered.
- There is innovation that matters a little now but could matter a lot in the future. Personalized target date accounts are being introduced that address the one-size-fits-all shortcoming of TDFs., because investing is personal.
- Advisor and investment manager interests conflict with Baby Boomer interests for safety. Surveys say Baby Boomers want safety as they near retirement, but they’re not getting it.
- Fees only matter a little because successful lawsuits have driven fees down to 30 bps on average. Passive management and collective investment trusts (CITs) are cheaper, but not by enough to influence a decision.
- Annuities matter, but as an alternative to lump sum payout, rather than as a part of a TDF.
- The post-retirement glidepath matters, but not that much because most withdraw from the TDF when they retire. I advocate a U-shaped glidepath that re-risks in retirement to extend the life of assets.
Things that just don’t matter, but are discussed a lot
- Active/passive management doesn’t matter because asset allocation is much more important. Safety near retirement can be provided with either active or passive. Safety just needs to be provided.
- Alternative investments don’t matter because the allocations to them are trivial if there are allocations.
- Most providers use their proprietary funds, which can’t be good because no firm is the best in all asset classes, but asset allocation matters much more. Although proprietary management is annoying, it doesn’t matter much.
- Customization is a ploy played by advisors to get paid. They copy the most popular glidepaths, so they’re way too risky at the target date.
- To-through is a distinction without a difference. Safe-or-Risky at the target date is a much more meaningful distinction.
- Performance doesn’t matter unless it is properly benchmarked, but it’s not. For the complete history of TDFs so far, high risk has won the performance horse race. This has prompted lawsuits of low risk TDFs for underperformance, which have fortunately not been won. Someday high risk will lose the performance horse race.
Conclusion
At $4 trillion and growing, TDFs are very important, but they are evolving very slowly. If improvements are ever going to matter to Baby Boomers, we need to focus on what matters and make that as good as it can be. The existence of an oligopoly makes this a challenge, but we shouldn’t give up. I haven’t.
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.
