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Should TDFs Be the Last Investment?

Target Date Funds

Overseeing another’s best interest is no simple task, whether as a parent, a caregiver or even a plan fiduciary. While there are many significant differences among these disparate roles, there are also similarities. In each of them there are differing attitudes when describing to what extent a responsible party should be involved in making decisions for others. 

Individuals who serve as fiduciaries of the corporate retirement plans are held to the highest standard of care. With that in mind, the question is: How much should fiduciaries do for plan participants?

A Modern-day Success Story

While target date funds first arrived on the scene in 1994, their acceptance, widespread usage and exponential asset growth did not begin until the Pension Protection Act was enacted in 2006. Since then there have been steadily increasing flows into default investments, and those assets have most often been directed or defaulted into TDFs. According to Georgetown University’s Center for Retirement Initiatives, by 2017, 93% of retirement plans used TDFs as their QDIA, up from just 64% in 2009. 

This greater acceptance among plan participants has helped fuel the asset growth in 401(k) plans from $48 billion in 2005 to $240 billion in 2010, and $730 billion in 2018, according to The Investment Company Institute.

A Look Toward the Future

TDFs have come a long way. But is that all there is? What is the next logical step for plan participants who have ridden the wave of growth and appreciation during their working years? We seem to be at a fork in the road – requiring a decision by the plan sponsor. What action by plan fiduciaries seems most prudent for retirees?

Read more commentary from Steff Chalk here.

Life expectancy is now a factor for older workers and those who are thinking about retiring. The World Bank tells us that during the 50 years from 1960 to 2010, life expectancy rose just over 12%, from age 70.00 to age 78.54. The term “longevity” has crept into the lexicon of the American worker, and it sounds great – but it concerns employers and retiring employees. Unfortunately, the term longevity plays havoc with the results of an investment strategy based upon TDFs. 

UCLA professor Dr. Hal Hershfield has studied for many years the roles of the “present-self” and contrasting it with the role of the “future-self.” The research tells us that the present-self regularly makes decisions that will ultimately be bad for the future-self. (Think losing excess weight, choosing to not exercise, or not saving enough for retirement.) 

Investing Beyond TDFs

Plan sponsors have a genuine interest in helping retired plan participants. However, plan sponsors also realize that a traditional date-driven TDF investment strategy will probably fall short of meeting the needs of a retiree who should anticipate a much longer time spent in retirement. 

Plan sponsors are starting to notice. Many have awakened to the challenges that an inopportune sequencing of returns can create for a portfolio and a retiree. They are asking for access to more income-oriented investment portfolios. 

A segment of the workforce has made good decisions when it comes to saving, but they are requesting the next generation of investments. Is it now time for a full sleeve of income portfolios to replace TDFs?

Steff C. Chalk is the Executive Director of The Retirement Advisor University (TRAU), The Plan Sponsor University (TPSU) and 401kTV. This column appears in the Summer issue of NAPA Net the Magazine.