How Real is Your Target Date?

A panel at PLANSPONSOR’s Future of Asset Allocation Funds conference in Sarasota, Florida, had differing perspectives about where the glide path should be at the target date.

T. Rowe Price’s Director of Asset Allocation and Portfolio Manager Richard Whitney said T. Rowe (like some other fund managers) views target-date funds as a lifetime solution. He said 65 is not a “magic” number; it is just the number when a participant stops accumulating. Whitney said that the T. Rowe program tries to offer a good investment program that is also behaviorally friendly, as individuals have a difficult time dealing with the complexity of the market.

However, not everyone agrees that individuals should continue to have a substantial investment in equities at retirement. Joe Nagengast, principal at Target Date Analytics, which offers a benchmarking tool for target-date funds, is one of those people. “In our thinking, the target date is key—it should represent the end of the glidepath,” he said. “What is the target date? It should be the name of the fund.” If it’s a 2010 fund, 2010 should be the end—and if it isn’t, it should be relabeled as “2040,” he said.

To put in perspective the difference over when the target date is, Nagengast said about two-thirds of the funds on the market ignore the date and one-third use the date by shifting to either wealth preservation or guaranteed income—areas where all of the funds need work, he said.

Kamila Kowalke, director of Institutional Markets at Dow Jones Indexes, which also provides target-date benchmarking, said she sees the target date as both the end of the accumulation phase and a bump in the road. “It is an end point and at the same time it has to be designed so that people can stay for a couple years,” she said.

While the industry can not completely agree on the correct glide path for target-date funds, how is fiduciary responsibility shifting? Nagengast pointed out that current legal fiduciary responsibility ends when the participant withdrawals, but he doesn't suggest abandoning participants. Some sponsors want to provide service after retirement, and some don't, he said. The fiduciary responsibility is to preserve, and so participants shouldn't be high in equities at retirement, Nagengast asserted. Letting participants walk out the door with 30% to 40% losses "is a crime," even if it's not illegal, he said.

Different Behaviors

One reason why there is not a one-size-fits-all solution at retirement has to do with the divergent behaviors of people at retirement, Nagengast suggested. At retirement, behaviors are all over the map, and so it is not as easy to come up with a model for distribution as it is for accumulation, he said. "It's something we as an industry need to keep working on," he said. Needs are so diverse, that the only "sane" measure is to stick with capital preservation. "The glide path can't solve the distribution phase," he added.

Whitney said he doesn't think participants are equipped to make a decision at retirement and should be led into lifetime income. If participants feel like they need to do things, they do the wrong thing, so simplicity in target-date funds is a good thing. He said that some defaulting at retirement has actually put participants into less aggressive investments than they would have chosen on their own.

The panelists illustrated their different views about allocation: T. Rowe's target-date fund has an individual in retirement at 50% equity and 50% bonds. The Dow Jones index fund is 70% low-risk investments and 30% high-risk at retirement, and Target Date Analytics is 100% in reserve assets. "When you hear this range, you get a sense of what plan sponsors have to grapple with," said PLANSPONSOR Founder and Director Charles Ruffel, moderating the panel.

Overall, the panelists seem to agree that the problem doesn't end at age 65—even if they can't agree on what that number means to asset allocation funds.

- Ellie Behling