US Senators Patty Murray and Bobby Scott have written to the Government Accountability Office (GAO) requesting that they conduct a review of target Date funds (TDFs), as they have grown to more than $1.5 trillion in AUM within 401(k)s and other defined contribution plans. The GAO last conducted a study on these investment strategies in 2011. Murray and Scott are concerned about the potential deviation in performance, fees, risk management, and asset allocation among the various providers that can dramatically impact participants, especially as they near retirement. I personally think that this is a critical issue that needs to be thoroughly vetted, especially since TDFs are now the QDIA for most DC plans.
According to a recent NY Times article, “many of the major target-date funds tailored for people retiring in 2020, for example, had roughly 50 to 55 percent of their investments in stock funds.” One 2020 TDF, which has over $16 billion in assets, is reportedly 60 percent invested in stocks. Furthermore, dynamic adjustments in asset allocation are rarely witnessed. Is a conservative (heavier bond exposure) implementation really conservative in this environment of near-historic low-interest-rates?
The review consists of having the GAO respond to 10 questions. I’m particularly interested in eventually reading the response to question 6: What percentage of plan sponsors (and their consultants) select off-the-shelf TDFs? What percentage of plan sponsors select custom TDFs? Is there a material difference in the performance of off-the-shelf versus custom TDFs?
Like many asset categories in our industry, the biggest, not necessarily the best, firms seem to attract the most assets. There seems to be a similar bias among TDF selections. As mentioned previously, the GAO has been asked to evaluate this space out of concern for the wide variances in performance and other important characteristics. As the chart below reflects, they should be alarmed that near-term retirees could be impacted so harshly. In 2008, many 401(k)s became 201(k)s. That isn’t acceptable under any circumstance, but it is outright criminal for the 2009 retiree.
Let’s hope that the GAO’s review leads to some important action regarding defined contribution plans and TDFs. If we don’t have the ability as an industry to sustain defined benefit plans, let’s at least make DC plans more palatable.