An important new study confirms the notion that savings outweigh asset allocation. In “How Important Is Asset Allocation To Americans’ Financial Retirement Security?” (Pension Research Council Working Paper, The Wharton School, University of Pennsylvania, August 2012), authors Alicia H. Munnell, Natalia Orlova, and Anthony Webb reach that conclusion using real-world data.
To paraphrase, all cash is a fine investment strategy if you save enough.
The stated objectives of TDFs are to replace pay and manage longevity risk, but that’s just the hype that lets fund providers sell product rather than solution. The industry doesn’t agree on the appropriate risk exposure near the target date. It’s no surprise that bond shops are mostly bonds (80%) at the target date while equity shops are 80% equities.
The target date is critical for profits since that’s when account balances are highest. It’s also critical to participants because lifestyles are at stake. There is a conflict of interest. Fund companies say the wide dispersion of equity allocations at target date is because of demographics – under-savers need more risk than the wealthy. Don’t believe it. There is a better way. Capital preservation should be the No. 1 objective of TDFs.
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The benefits of TDFs are diversification and risk control. Both could be better. Diversification is inadequate because most TDFs are predominately U.S. stocks and bonds. Low fees equate to low diversification, since diversifying assets command a high price, namely commodities, real estate, natural resources, foreign stocks and bonds, etc.
Similarly, TDFs are too risky. We learned this lesson in 2008 when the typical 2010 fund lost 25%. Nothing has changed since, so the vulnerable remain exposed to large losses as they near retirement, which is shocking.

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