Fiduciary Alert: Target Date Funds Are Still Playing With Fire Despite 2008
The strategic responses to 2008’s losses have been minimal. Consequently, you are exposed to more fiduciary risk today than you were three years ago because this time there is no excuse for sloppy risk management.
Mutual fund companies are simply offering product, with little fiduciary liability on their part, whereas your selection carries great responsibility. Because they are predominantly defaults, TDFs are employer directed, which dictates a higher standard of care than participant directed elections.
You can’t blame a fund company for your investment losses, however painful they may be at the target date, but you can guard against the pain by choosing a conservative glide path.
Despite its convenience and popularity, entrusting TDF assets to your bundled service provider is a decision to expose defaulted employees nearing retirement to excessive risk of approximately 55% in equities. You need to know the ending equity allocation of your TDF selection, and to embrace that exposure because you own it.
Before TDFs became popular the tradition was to default employees into money market funds, a sound practice for those nearing retirement. Has the status of TDFs as Qualified Default Investment Alternatives (QDIAs) suddenly overturned the tenets of prudence? With no credible justification whatsoever you’ve moved from safeguarding savings at retirement date to 55% in equities. Why?
Managing longevity risk is not a justification since most withdraw their savings at retirement, plus there is no glide path that can realistically manage longevity risk other than the Hemlock Fund.
Don’t wait too long: The 2020 target date funds of major providers have lost about 8% year-to-date, while the S&P 500 index has lost 8.9%. These TDFs are losing almost as much as the stock market for those nearing retirement. Read more at Fire Alert.
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