Without question, asset-allocation solutions—particularly target-date fund solutions—are well on their way to becoming a dominating force on retirement plan menus. More than three-quarters of the roughly 5,000 respondents to last year’s Defined Contribution Services Survey already had one of these options on their menu.
Moreover, the popularity of these offerings has resulted in a burgeoning number of choices, with what seems like a new introduction every other week, and by some of the most well-known and highly regarded names in the asset management business.
Having said that, the notions of what constitutes an “appropriate” asset allocation, much less an appropriate asset-allocation fund—or fund family—are varied, to say the least. Almost as varied as the number of choices, in fact—and it appears that those notions are shifting as well. These “moving” targets (see “Moving Targets”) will keep us all on our toes for the foreseeable future—and I suspect that we will all bring to that evaluation process certain grounding biases as we evaluate the alternatives, whether we admit to them or not.
Here are some of mine:
Stock up. Longer life spans suggest (to me, anyway) a need for more equities, longer, than traditional asset-allocation models seem to call for. At the moment, the primary battle for the “hearts and minds” of target-date design seems to focus on the amount—and motivations for the amount—of equities in the portfolios, particularly the further one goes out on the time horizon. The equity markets have been kind of late (to say the least) to those who have leaned heavily on them. Some target-date offerings have beefed up their equity allocations; others have grown increasingly critical of those decisions. The bottom line: I find that many of the more “conservative” asset-allocation strategies look very much like the traditional asset allocations of 40 years ago. That was then….
"Go long" in matching matching participants with target-dates. Although participants are already talking more about working past age 65, the current logic associated with picking a target-date fund still largely focuses on when you will attain 65. Even though most of the literature speaks to “retirement date” as the target, I think it’s a good idea to round “up” when it comes to picking the right choice.
Risk evaluation shouldn’t be a one-way street. When it comes to discussions of risk, I find that the risk of outliving money isn’t weighted as strongly as the risk of losing money. Now, this is a tricky thing because people tend to worry hugely about the latter until they get to a point where the former is a reality—and then, of course, it’s too late. This is exactly why participants (and plan sponsors who make default investment choices for participants) lean toward stable value and money market fund choices (see “Other People’s Money”). Now, I’ll admit there’s a big difference between going 100% stable value at age 30, and going 80% fixed income at age 60. But I think some of those conservative allocations don’t contemplate actually having to live on those investments for a quarter century—though once you get to age 65, the odds are pretty good.
Bond funds don’t act like bonds. Consequently, those late-cycle diversifications into bond funds don’t feel like they accomplish the same thing as diversifying into bonds. It’s one thing to pull some gains out of the stock market and invest in a security that stands a reasonable chance of returning your principle at a definite point in the future with scheduled interest payments along the way. Something else altogether, IMHO, to make that same investment in a bond mutual fund. Less volatile than stock funds, perhaps—but also more volatile than bonds, in my experience.
No doubt you have biases of your own, perhaps even some of the above. No doubt at least some of you would take issue with some of mine. I hope so. Clearly, no one person or firm has all the answers, and just as clearly, the ones who think they do—probably don’t. What’s important is that we continue to ask the questions, challenge the assumptions, doubt the “common wisdom.”
Ultimately, the quality of the answers lies in the quality of the questions—and the people asking them.
Nevin E. Adams, JD
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