Page 45 - Investment Advisor July/August 2021

Several questions in the letter go • Some plan sponsors faced challeng- low economic theory, one concern is that
beyond asking how many plan partici- es in the TDF selection and monitoring “there are some people who may think it’s
pants default into TDFs. process. almost like a guarantee that if I’m invest-
For example, they ask “to what extent The Department of Labor and ing in a [TDF], I can successfully retire at
have participants approaching retire- Securities and Exchange Commission my target date. And of course it’s just an
ment age who are invested in TDFs took steps to improve TDF disclosures, investment account. All [a TDF] knows is
been affected by market fluctuations participant education, and guidance for the age of the participant; it doesn’t know
as a result of the COVID-19 pandemic? plan sponsors and participants. The SEC anything about their risk tolerance.”
How much variation is there in the per- also issued new advertising and sales Yet there are those who strongly sup-
formance of TDFs of the same vintage literature disclosure requirements for port TDFs, including Christine Benz,
(i.e., target retirement year), particularly TDFs. In 2013, the Labor Department Morningstar’s director of personal
for TDFs at or near the target retirement issued a fact sheet on TDFs: Tips for finance. In a recent column, she cited
date? To what extent have TDF provid- ERISA Plan Fiduciaries. three key reasons these funds work: 1)
ers taken steps to mitigate the volatility they allow investors to be truly hands-
of TDF assets?” RISK EQUATION off, 2) they provide cost-effective advice
The committee also asked about asset One issue, seen by both the committee and 3) they contribute to a good outcome.
allocation and fee structure differentials and others, is the risk in the allocation She believes they are underutilized in
as well as shifts to more conservative as these funds grow close to the target 401(k) plans and says they would work
investments as these funds move closer retirement date. Ron Surz, president just as well in IRAs. (For a ranking of the
to retirement. Another question noted of Target Date Solutions and CEO of top TDFs, check Morningstar.com)
a Trump-era change allowing TDFs to GlidePath Wealth Management, notes Benz was backed up further by her
include alternative assets such as hedge that funds from the big three TDF colleague John Rekenthaler, vice presi-
funds and private equity, seeking to firms — Vanguard, Fidelity and T. Rowe dent of research for Morningstar, who
understand the number of funds that Price, which he says run about 65% of in a May 20 column took to task a study
use these products and their risk level. the money in TDFs — have a high level that criticized TDFs. He argued that
Finally, the committee asked the GAO of portfolio risk at the target date. TDFs are “relatively cheap.”
to recommend what legislative or regu- “They are about 55% of equity at the For instance, the median annual
latory options would bolster protection target date,” he told Investment Advisor. expense ratio for a 2035 TDF, including
of those nearing retirement but also “Fifty-five percent is too much for sure, all underlying fees, is 0.65%, while for
achieve the “intended goals” of TDFs. but [now] 35% of bonds are risky, too. their closest investment rivals, it’s 1.01%.
So you have 90% of risky assets at the “Across the board, they cost substantial-
PERFORMANCE VARIATION target date. It’s just a time bomb waiting ly less than does the typical allocation
After the 2008-2009 financial crisis, the to happen.” fund,” he said.
GAO studied TDFs and found several Instead, he believes these funds should But many believe the congressional
points, among those: follow the Federal Thrift Savings Plan, inquiry is a good one.
• A large variation in allocation which has some $769 billion in assets and Pfau said that “the [HELP] letter made
between stocks and bonds closer 6 million participants. The plan’s lifecy- sense.” Congress sees that TDFs are grow-
to retirement date. Some TDFs had cle funds allocate 60% of assets to short- ing in popularity, but it wants to know
dropped stocks to a 35% allocation, while term government-backed securities two more about their growth, fees and asset
others remained around the 60% range years before the retirement target date. allocation. The whole idea of the target-
“in the belief that relatively high equity Another option would be to warn date fund is you can have more volatility
returns will help ensure that retirees do participants with better designations — when you’re young, but when you’re get-
not deplete savings in old age.” fund names would include a “risk of loss ting closer to the target date, you want to
• Performance varied significantly. at target date” with a severe-, moderate- start locking in with a lower stock alloca-
For example, between 2005 and 2009, or negligible addition, and would also tion and have less volatility,” he said. “And
annualized TDF returns for the largest help “enlighten” fiduciaries, Surz says. now with some of the new trends towards
funds with five years of returns ranged However, some say this isn’t necessary alternatives and different asset allocation
Adobe Stock rate of return for all individual partici- the fund data. ity around the target date in a way that
as it’s already defined when reviewing
approaches, is that creating more volatil-
from +28% to -31%. However, the mean
users of [TDFs] don’t really expect?”
pants was 4.3%.
Pfau notes that although TDFs fol-
JULY/AUGUST 2021 INVESTMENT ADVISOR 43