So far this year, stocks have lost 13%, and bonds have lost 9%, providing a challenge to target-date funds (TDFs) for those near retirement. Specifically, 2020 TDFs for those retiring between 2015 and 2025 are supposed to protect investors, but they have not because bonds are not safe.
This recent failure to defend is a wake-up call for fiduciaries to examine the risk they have chosen to take in their TDF selection. It’s the $3 Trillion Gamble Fiduciaries Are About to Regret.
These failures are likely to continue because the Fed needs to allow interest rates to increase if it is going to control inflation. It can’t control inflation while executing its Zero Interest Rate Policy (ZIRP). That said, some are betting that the Fed will back off as it did in 2013.
TDF defense
A few TDFs are defending with cash rather than bonds. They are very safe at the target date. Congress has requested a study of why the Federal Thrift Savings Plan (TSP) is safe while the industry is not. In addition to the TSP, a large union plan’s TDF is also very safe—The Office and other Professional Employees International Union (OPEIU).
The following graph compares OPEIU’s results to the industry.
The industry is 85% risky at the target date, with 50% in equities and 35% in risky long-term bonds. Consequently, the industry’s 2020 Fund has lost 9% YTD, almost as much as the 2060 Funds’ 11.5% loss.
By contrast, the OPEIU Conservative 2020 Fund lost only 2.7% because it defended with Stable Value. The Conservative glidepath is OPEIU’s qualified default investment alternative (QDIA). OPEIU also provides Moderate and Growth glidepaths for non-defaulted beneficiaries and their 2020 Funds have also outperformed the industry.
Conclusion
TDFs failed the 2008 test of safety, but this is long forgotten. The next test might just be beginning. In 2008 there was $200 billion in TDFs. Today it’s more than $3 trillion. And this time some in Congress are watching.
TDFs should be much safer. Lawsuits would make it so.
Ron Surz is President of Target Date Solutions, a DBA of PPCA inc. He is also the author of Baby Boomer Investing in the Perilous Decade of the 2020s. He can be reached at Ron@TargetDateSolutions.com.