401(k) Specialist Issue 3 - 2021 - 40

401(k) INVESTMENT INSIGHT
A Better 401(k) Target Date Fund Choice
Than 'To' or 'Through'
By Ron Surz
THE WORDS " TO " and " through " as they relate
to target-date funds were coined on June
18, 2009 at the Hearing on Target-Date Funds
and Similar Investment Options.
They mean:
* Through: The target date is a speed bump
in the highway of life, so risk is not at its
lowest point at the target retirement date.
* To: The target date is the end of the investment
mission. Accumulation only, so
there is no " beyond the target date " -the
lowest risk is at the target date.
Subsequently, the Department of Labor's
DOL target-date fund (TDF) tips for plan fiduciaries
recommended that fiduciaries decide
which type they prefer. DOL target-date fund
tips for plan fiduciaries recommended that
fiduciaries decide which type they prefer.
The common belief is that " to " funds defend
better at the target date than " through, " but
this is incorrect because some " through " funds
are in fact safer than some " to " funds.
A More Meaningful Distinction
A more straightforward distinction is between
safe or risky at the target date. This is simpler
because target date funds can be grouped
this way; there are just two such groups. And
it's more straightforward because it directly
addresses the intent to be safe or aggressive.
The TDF industry has split into two factions.
One faction, anchored by the Federal Thrift
Savings Plan (TSP), believes that beneficiary
savings need to be protected near the target
date, with no more than 30% in risky assets.
This allocation is in line with surveys of beneficiaries
and advisers by PIMCO and MassMutual.
The TSP is joined by the Office Professional
Employees International Union and the SMART
Target Date Fund Index.
The other faction, anchored by the Big
Three TDF providers-Vanguard, Fidelity, and
T. Rowe Price-believes that significant risk
is necessary to compensate for inadequate
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ISSUE 3 2021 | 401kSpecialist.com
individual retirement account (IRA) since
most beneficiaries withdraw their account
at retirement. Investment losses drop this
baton and reduce the standard of living
throughout the rest of life.
There is a well-documented " Risk Zone "
spanning the 5-10 years before and after retirement
when investment losses can irreversibly
spoil the rest of life.
* The DOL advises that TDF selections
match workforce demographics. The only
demographic that all defaulted beneficiaries
have in common is financial illiteracy.
These naive beneficiaries need protection.
" There is a welldocumented
'Risk
Zone' spanning
the 5-10 years
before and after
retirement when
investment losses
can irreversibly spoil
the rest of life. "
savings. Many currently argue that long-term
bonds no longer provide protection, so the
Big Three is 90% in risky assets at the target
date-55% equities plus 35% long-term bonds.
Choosing Between the Two Options
The procedurally prudent choice is to go
with the Big Three because they have most
of the $3 trillion in TDF assets, but it can be
argued that substantive prudence requires
safety for these six reasons.
* There's a 'baton pass' at retirement from
the 401(k) plan to either an annuity, or an
* We have a retirement crisis characterized
by woefully inadequate savings. The Big
Three aims to mitigate this crisis, but the
SEC warns against increasing risk because
it could worsen the problem. It recommends
education instead to heightens
awareness of the importance of saving:
Save and Protect.
* 78 million Baby Boomers will spend
much of this decade in the Risk Zone as
discussed in Baby Boomer Investing in the
Perilous Decade of the 2020s. They were
not in the Risk Zone in 2008. There is $3
trillion at stake today versus $200 billion
in 2008.
* There have been decades like the 1910s
and 1970s when all asset classes had negative
real returns. There is precedent, plus
this current decade is not likely to repeat
the previous decade.
Safe or aggressive are more meaningful
choices than " To " or " Through " when selecting
a TDF, and this choice is simplified by having
two distinct factions.
Ron Surz is President of Target Date Solutions and CEO
of GlidePath Wealth Management. He can be reached
at Ron@TargetDateSolutions.com.
http://www.401kSpecialist.com
401(k) Specialist Issue 3 - 2021

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