When Is It Not Conservative?

The co-creator of the 401(k), Ted Benna, is raising an issue that I’ve been wondering about for years. Mr. Benna has published a book that’s part history book, part how-to manual, for plan participants.  It covers a wide range of issues, but one in particular is the greater use of target-date-funds (TDFs) as the default offering. He (nor I) is not opposed to their use as a QDIA, but fears that plan participants do not understand the potential risks associated with their use, especially as one nears retirement.

For instance, many of the target-date-fund providers have a TO retirement philosophy, as opposed to a through philosophy (to demise) designed to reduce risk as one nears that last date of employment. However, as is the case in many of the offerings, fixed income exposure is increased and equity exposure decreased. Yet, after a roughly 35-year bull bond market, are fixed income assets really the conservative choice, especially as U.S. interest rates are rising? How short in duration are these exposures and how does the composition of the exposure change among Treasuries, agencies, corporates, etc.? Given the rampant increase in BBB offerings, are these plans protecting their clients from adverse market moves?

The group of near-term retirees is the most vulnerable to a market decline. Just reducing equity exposure in these funds is not necessarily protecting the participants from the potential for dramatic losses. TDFs need to be more tactical in their exposures and the sponsors of these funds need to do a better job of communicating the potential risks associated with the various allocations.

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