Should Your Target-date Fund Be DB-ized?

Many of the enhancements touted for defined contribution plan design are said to make them operate more like defined benefit plans — but does that apply to target-date fund (TDF) designs?

A recent Vanguard blog post () notes that the notion typically manifests in a recommendation that the TDF use best-in-class active managers, or incorporate more specialized asset classes or a variety of alternative investments. But the article also cautions that “DB-ization” can “easily overcomplicate TDFs for both sponsors and participants, as well as increase costs, reduce transparency, and create entirely new risks.”

The core issue with this DB-ization of TDFs? DC plans are not DB plans.

The author goes on to note that DC plans don’t come with a benefit formula, and lack a uniform “liability target,” even for individual participants with the same retirement date. Consequently, he argues that a single, optimal strategy isn’t practical given the differences from participant to participant.

In DC plans, participants directly bear investment risks, without the backstops against risk available to DB plans. Further, the author takes issue with the short-term focus of the investor, with performance reported and probably tracked daily — and the on-going potential of a liquidity draw due to an unscheduled loan or withdrawal, or even a transfer to other funds.

What do you think?