The chairpersons of two of the leading retirement plan committees in Congress called for a review of target-date funds, questioning both the asset allocation of those funds at retirement and the composition of asset classes in the funds overall. So, what do NAPA-Net Readers think?
‘Through’ Put?
We started by asking readers whether they, generally speaking, recommended target-date funds with a “to” or “through” retirement date glidepath:
47% - Both to and through retirement, depending on the particular plan
39% - Through retirement
12% - To retirement
2% - Whichever is offered by the provider of choice
“We look at the demographic detail and whether the participants rely on keeping funds invested in the plan during retirement or doing IRA rollovers,” explained one reader. “Generally, for micro through small plans, it tends to be a more ‘to’ approach and larger plans are setup for ‘through.’ Educating employees on cost, convenience and investment choices relative to what is available allows them to make the right decision for them.”
Other comments:
I prefer Managed Accounts, but depending upon the glidepath optimization analysis (GOA) score, utilizing plan demographics, we will recommend through or to.
I feel this offers the most robust possibility or portfolios for employees of multiple risk tolerances.
When selecting a TDF, we show various types but our clients 100% agree with this that the risk for people using TDFs (or not) is longevity risk, not volatility risk. Further, a through is consistent with our committees’ philosophy of encouraging people to stay in the plan even when they retire. I’ve never understood the thesis behind a “to” and likely why we don’t see that many. I consider it short term focused ... not what we preach.
The problem with many TDFs is that they are too conservative too early.
Every client is different and has different needs.
I prefer “through,” but would explain the different approaches with the plan fiduciaries so they understand exactly what they are selecting and why.
I believe we’re going to see new solutions that address lifetime income, therefore we might see a shift to more of a “to” approach.
But only AFTER a thorough discussion of the merits of Managed Accounts as an alternative QDIA to TDFs.
People still retire at or before age 65, & having unnecessary equity risk when they are about to retire makes no sense. especially since there is not enough outperformance in through glidepaths to justify that huge risk.
Many clients live 20 years into retirement, while in the plan I prefer a to retirement and then rollover once in retirement.
I have made it my business mission to never use TDFs in the plans I advise on. There are multiple problems that the mutual fund industry has created with age-based asset allocation programs. I provide Managed Accounts and technology via IJOIN that allows a participant to select a managed account that is individualized, not age-based.
Since most beneficiaries withdraw at retirement, they’re all de facto “to” funds.
“Through” retirement date allows the investor to stay in the TRD environment all the way through end of life in a managed and diversified investment product. A great advantage for an unsophisticated investor.
The date should be there for a reason. This aligns with most participant’s expectations.
I prefer use “to” glidepaths as I would prefer an individual reaching retirement age elect higher equity exposure at retirement age.
With the advent of the Secure Act 1.0 and it provision for lifetime income strategies, target date funds must provide for that eventuality.
Equity ‘Able’
The chairpersons in question (Sen. Patty Murray (D-WA), Chair of the Senate Committee on Health, Education, Labor & Pensions, and Rep. Robert Scott (D-VA), Chairman of the House Committee on Education & Labor) expressed concerns about the amount of equity investment in 2020 target-date funds—and so I asked readers about the asset allocations (generally speaking) in the 2020 fund(s) of the fund families with which they generally work:
29% - 50/50 stocks/bonds
24% - 60/40 stocks/bonds
24% - 40/60 stocks/bonds
6% - 30/70 stocks/bonds
6% - 20/80 stocks/bonds
4% - 70/30 stocks/bonds
1% - 10/90 stocks/bonds
About 6% weren’t sure.
“Ballparking”—these tend to vary a lot more than 2050+, explained one reader.
After completing the GOA for suitability, we look at performance utilizing a customized version of FiRM, then 8 drawdown periods from 2008-2020 where S & P declined more than 10% to see how the best performed. Finally we look at upside capture in the vintages most distant from retirement.
I don’t really like the question, because it doesn’t allow for variety. We have multiple fund families’ target date funds available. As a result there is great variety. That being said, the most popular of those has a 60/40 allocation in the 2020 fund.
Alternative Aspects?
And then, because the letter also called out moves made by the Department of Labor under the Trump administration which they say “paved the way for the use of potentially higher risk and more lightly-regulated ‘alternative’ assets, such as private equity”—well, I asked readers to what extent the target-date funds they recommended include alternative assets, such as hedge funds or private equity?
57% - None do
22% - A few do
11% - I’m not really sure
7% - Some of them do
3% - Many of them do
The portfolio managers probably use these categories to achieve alpha against their peer group. The use of stocks, bonds, & cash may not have enough potential to “rise above” the competition.
But we know that the TDF managers we tend to use have this on their radar (as they should).
But it is something I am looking at.
Nor do I want them to. Not worth the risk or the extra cost.
I answered “none do” but really should have a box for “none do...to my knowledge...” (Maybe I should have checked the “I’m not really sure” box instead...)
No PE, but some do have alternatives, depending on how you define alternatives (Commodities)
Too exotic to explain to the average investor, and not worth the risk.
GAO Outcomes?
And then, because the GAO was asked to look into these matters, I asked readers what they thought come from that report—and multiple responses were permitted:
32% - Condemnation that participants don’t really understand target-date funds, even though most participants really don’t WANT to understand target-date funds
22% - Nothing good
21% - A discussion about the difference in philosophy between “to” and “through” target date glidepath philosophies
20% - A greater appreciation for the complexity and contribution of target-date funds
18% - A greater awareness of the importance and prevalence of target-date funds
18% - No earthly idea
Many factors comprise the target date approach. The GAO will present the scope of these investment funds and will possibly recommend greater education regarding the philosophy/appropriateness for the participants. They will probably comment that advisors should remain collaborative but neutral with Investment Committees on the selection and use of a Target Date Fund system for their participants.
More focus on suitability and ongoing review.
I am optimistic that lawmakers will try to understand “how things work” and be pragmatic as to their solutions. Too often do companies and people looking to protect their profit get involved in the discussion creating a bias that degrades the “spirit of the law."
What will not be shown is the lack of knowledge by our elected officials about these investments. While some oversight is necessary, overreaching governance will not help to build trust in advisors and better management by providers. Government is not suited to take care of people from adulthood to grave, people need to take some responsibility themselves.
The GAO report worries me as i do not think they have a clue about participant behavior.
God I hope this doesn’t result in yet another wordy notice that participants aren’t going to read, but if their final assessment is that we aren’t doing enough to help participants understand TDFs, then I’m afraid the solution is going to be another dang notice.
Aside from keeping our paper industry in business this and most all government agency reports are a waste of time and tax money and generally only make things worse. Focus should be on stressing need for individual accountability to save for a secure retirement.
The aim is to educate employers but the result will only reaffirm what good advisors teach their clients and do nothing to nudge the lazy advisors who only want to use a scoring report to monitor and replace TDFs.
They will probably require passive solutions even though there is no such thing as a passive TDF.
Seems that this study is nothing more than a way to further push a government run retirement program and further expand government reach. Asset managers in our opinion are proving to be much more wise stewards of helping build products that can truly help participants save and grow assets that they can rely on for a dignified retirement. We would help advocate as strongly as we possibly can that expanding government into this role would be detrimental at best to participants to what they have today.
The greatest source of profitability in a 401k plan provided by the largest companies (Fidelity) is in their business plan to capture assets through their TDFs. The intrinsic value to the participant is secondary to the profitability of big mutual fund companies. Plan Sponsors need to be made more aware of other ways to provide “do it for me” solutions.
A lot more work for advisors. And a lot more doubt cast in the minds of savers. Neither of which is good.
I think they’ll conclude that glide paths and asset classes shouldn’t be legislated and any results will be about disclosures.
“Guidelines” from DOL that Plan Sponsors follow before selecting TDF as the QDIA along with calls to move to more target risk funds.
I hope something actually happens to protect those near retirement
We always hope for a good development but can anyone say ‘FIDUCIARY RULE’??? probably will become another bone of contention that politicians don’t understand anyway since they’re mostly insulated from regular life through their excessive pay, attraction to attention & the outrageous and simply thinking of themselves as more important than they should.
It will be a political witch hunt and nothing more. In support of their efforts and costs of this project, they will issue some sort of statements including awareness and condemnation (of what they feel) of alternative investments in target date funds.
Nothing, but it should come out that this is where the proprietary fund companies hide all the recordkeeping fees!
However, without any direct correlation between the GAO findings and some type of guidance with regard to limiting fiduciary responsibility of the Plan Sponsor similar to what is found in 404c and QDIA rules, this will be a lot of bluster...
And then, as usual, there were LOTS of reader comments on the subject(s). Here’s a sampling:
There’s still much more education that needs to happen on this subject to plan sponsors and participants.
TDFs are actually simple and produce some of the best outcomes for the largest population of participants—professional management and matching risk to retirement age vs filling out an arbitrary forms to assess a target risk level.
Retirement plans and investments are already highly regulated and subject to scrutiny. I think Congress should spend it’s time on more critical issues, like figuring out how to keep social security funded and making health care more efficient (not socialized).
Participants like target date funds. They generally are not interested in knowing what’s under the hood. Fund managers in this space know that full well, and should be especially careful to not abuse that trust.
The financial professionals and companies providing advice and consulting services should be the ones to inform the plan sponsors and be required through the existing 408(b)(2) and 404(a)(5) disclosure requirements as to the cost and construct of these funds. Disclosures do little for the participant unless it is presented in “lay” terms. Legalese jargon has no resonance with everyday people and so the “good” of those documents were not as impactful as perhaps the original intent of regulation was targeting.
Congress has better things to do than stick their nose in this subject.
It is generally the QDIA and employers need to pay more attention to it. Most PS don’t have a clue. In an up-market, I find negligible diff between MA and good TDF companies like American funds.
TDFs have provided a solution for the unengaged and hands-off employees. TDF are not the perfect solution for all participants but they do solve the investment decision making barriers that have proved to be a major hurdle for plan participants. I still believe TDF have a major role in retirement plan investing.
I am a HUGE proponent of TDFs—for both sophisticated and unsophisticated investors I applaud this focus as my concern is the proliferation of proprietary/“managed”/custom—whatever you want to call them—TDFs that seem to keep coming... and my cynical side says, as a way to monetize a relationship, not because it’s a better mousetrap. Thus far, our independent research has shown that many of these “custom” TDFs have worse risk adjusted returns and oftentimes, higher fees. I think this is what the GAO is getting at. More power to them.
There is no perfect default solution for default type of investments in retirement plans. TDFs address the need for simplicity for the vast majority of Americans.
TDFs do a great job helping participants have an appropriate asset allocation and stay the course during periods of volatility.
I’m old enough to remember money markets used as the default. TDFs are WAY better than that... at least people stand a chance with TDFs! We do so much to make sure that participants have access to all of the information they need to make informed decisions, often times including the ability to speak to an advisor one-on-one. When a large percentage of the population chooses not to utilize the tools, resources, and people available to help them, the answer cannot be “bury them in more paper!” Why does this have to be so darn complicated?! :)
In general TDFs are a significant improvement because most people do not have the time, expertise or desire to manage an investment portfolio. Problem is most TDFs are too conservatively managed. I usually advise people to go out 5-10 yrs beyond their target date.
Seemingly that the glidepath & asset allocation appears to be the most important piece of a TDF, and that the focus on alt investment strategies might detract from that.
TDFs are elegantly simple. Tell us the year you were born and we have the ideal asset allocation in a simple, packaged up mutual fund. They are a ripe area for manipulation in favor of the manager. As long as the brand has a good reputation, aggregate expenses are low and performance is in line with other similar TDFs, they can use the fund to seed other products OR grab excess revenue here and there. Mutual fund rules also restrict these funds from being able to use certain techniques to protect against downside (like using Stable Value inside the fund for example). Currently Managed Accounts will often present a better overall service in my opinion.
Congress is not suited to evaluate. There is enough competition in the marketplace and plenty of choice.
The very essence of TDFs were to help employees who don’t want to know. And it’s not the “not knowing” of employers but the lack of due diligence on the part of advisors to help their clients with the required due diligence of these complex investment vehicles.
I’ll be curious to see what the GAO has to say about proprietary usage and how that impacts plan pricing and participant outcomes. I’m also curious about their take on the upswing in TDF CIT usage, especially the pseudo-custom CITs being offered now by so many record keepers.
Most participants who choose to invest in target date funds (or don’t elect because they allowed themselves to be auto enrolled) are not interested in managing the investments in their accounts. They want their accounts to be on auto pilot with the investment manager making decisions regarding the asset allocation and glide path. TDFs generally work very well for those participants.
Just has to be more regulations on these things that are QDIAs. too many firms making money grabs or managing recklessly for participants. at some point we need to protect these employees since the K plan is their only savings vehicle for retirement.
I think this is a good time to revisit the use of custom participant managed accounts with custom glidepaths. the costs have come down significantly and are better choice for all participants that will engage the solution with a simple questionnaire.
They are a great way for a participant to get a diversified portfolio that slowly gets more conservative as they near retirement. They are powerful and effective tool to helping someone build and grow wealth for their later years.
Nothing good comes out when the government gets involved.
The idea of buying more and more into the bond market regardless of interest rate cycles is irresponsible of we in the pension plan business. This is what we call the ‘glidepath.’ It is a preset strategy that does not account for market risk.
Target Date funds have done so much good for so many workers. It is a shame to see the government sticking its nose into something unnecessarily in an area where I believe private industry has done a good job. (And, to be clear, I’m not some “small government” fanatic, I voted blue in the last election!) Admittedly there is never a “one size fits all” when it comes to investing for retirement—but Target Date has done a great job of being “one size fits many” (arguably “one size fits MOST”), and, overall, has helped both workers and their employers.
Outcomes of plan participants can’t be managed by TDFs as advertised. The assumption that the longer one holds their risky investments is on full display in TDFs. Buyer beware. Participants only have “1” retirement.
I’ve been in the investment business since 1982 and believe that TDFs have been a true blessing to participants. I use them in my own portfolios. Our CIO uses them in his 401(k). There are so many reasons to recommend them. I also think the fund families do a good job of providing information about glide paths and risks.
TDFs provide an important investment strategy for the general participant who is unsophisticated about investing, if afraid of making a wrong decision on their own. Too many non-target date investors are either too conservative or too aggressive if a TRD series is not an option in their 401k Plan.
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll!
