A Guide Path for Your Glide Path(s)

A recent report—and a new wave of litigation—reminds us that all target-date funds are not designed the same. 

We all know that target-date funds are different, even if their names sometimes suggest otherwise.  Different management teams both set and monitor asset allocations—allocations that can vary widely with regard to the type and quantity of underlying assets. Fees can certainly be different, and some favor a reliance on passive investing versus an active engagement. But the difference that can often account for many of the other differences is the glide path, and more specifically the glide path’s “goal”—and here I am referring to the difference between funds that opt for a “to” retirement versus a “through” retirement focus. 

Now, admittedly it’s a “target date” fund, not necessarily a retirement date fund—and indeed if those were once upon a time considered one and the same, that’s apparently no longer the case. Indeed, and as a recent stream of litigation reminds us, the largest target-date fund providers these days are nearly all in what we call “through” retirement date funds, meaning that their glidepath is designed to carry you past the traditional retirement date “through” to the end of your life.

That’s not an illogical approach—after all, once you get to 65, your odds of making it to 85 (or beyond) are surprisingly good, and two decades is a lifetime[i] (and then some) when it comes to investment time horizons. Indeed, and without question, target-date funds have been a godsend for millions and millions of individuals who are time-pressed and lacking in investment expertise. Let’s face it, even those who have a fair degree of investment acumen find it challenging to keep up with the demands of personal portfolio management alongside the demands of a daily schedule. 

That said, a recent Morningstar whitepaper cautioned (in its title, helpfully) “Plan Sponsors May Not Always Consider Participants’ Behavior or Needs When Selecting Target-Date Glide Paths.” That paper cautioned that “through” glidepaths generally include around 13 percentage points more in equity at age 65 than their peers invested in “to” glide paths, as the average “through” series holds 46% in stocks versus just 33% for the average “to” series. That makes them riskier (or at least more volatile), and potentially riskier than those defaulted into those options may know—or desire.

Therein lies the rub—the Morningstar paper also reminds us that nearly a decade ago the Labor Department provided some "Tips for ERISA Fiduciaries" regarding target-date funds. Tips that included the importance of “Establish[ing] a process for comparing and selecting TDFs,” under which the Labor Department suggested that plan fiduciaries “… should consider how well the TDF’s characteristics align with eligible employees’ ages and likely retirement dates. It also may be helpful for plan fiduciaries to discuss with their prospective TDF providers the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.”

Considering the variety of workforce demographics, and the relatively small number of target-date providers garnering the majority of money flowing into TDFs, it seems unlikely that many plan sponsors have yet really focused on the Labor Department’s tips, specifically with regard to questions of demographic alignment with the TDF glidepaths. For those who haven’t, it’s certainly worth a (re)consideration. 

And while you’re at it, it might be a good idea to make sure that it’s aligned with the communication and education to the participants who’ve been placed upon them.

- Nevin E. Adams, JD

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[i] More cynically perhaps, one can understand and appreciate the interests of those designing the glidepaths in assuming that those invested there would choose to continue to retain that investment expertise, rather than cycle it down and reinvest in a completely different asset class.

A Pension Protection Perspective

It’s hard to believe, but the Pension Protection Act of 2006 will be a decade old next month. And it’s probably done more good for the nation’s retirement security than most realize.

The PPA drew its name from the portions targeted at shoring up defined benefit plans (and PBGC funding, I suppose), though at the time I remember most people thinking it was an ironic name, in that it may have been intended to secure the pensions that were already in existence, but might well accelerate the demise of some on the cusp, and in any event was unlikely to help spur any new growth in that area. Some went so far as to call it the Pension Destruction Act.

Indeed, at a recent panel session featuring the perspectives of a number of the Hill staffers who shepherded the at times controversial legislation through its passage, the emphasis was largely on the DB aspects that, though well-intentioned, had been overwhelmed (if not undermined) by the onset of the 2008 financial crisis and the “historically low” interest rate environment that continues to pressure pension funding to this day.

DC Developments

In contrast, the aftermath of the PPA on the defined contribution side has been nothing short of extraordinary. Sure it was all voluntary – the use of carrots like safe harbors for automatic enrollment, rather than the sticks that accompanied the DB provisions. And yet, seemingly overnight, and without a government mandate or regulatory imperative, the decades-old concept of “negative election” (now “rebranded” as automatic enrollment) became part of every credible retirement plan advisor’s toolkit.

Without relying on a mandate to impose its will, nearly overnight the paradigm on automatic enrollment shifted. Sure, it’s still far more common among larger employers than those downstream – and yet, those larger plans are where most participants are. And if the adoption of contribution acceleration has lagged behind automatic enrollment, it is nonetheless far more advanced than it would have been in the absence of the PPA.

For my money, the biggest long-term positive impact of all may have been the rapid expansion of the qualified default investment alternative (QDIA) as the plan default investment option. One need look no further than the millions of dollars in retirement savings that have been channeled into a range of professionally managed asset allocation solutions to appreciate the impact that change has had. All have significantly and positively moved the needle in helping enhance the ultimate financial security of thousands, if not millions, of American workers.

‘Staying’ Power

However, perhaps the most-overlooked, if not underappreciated, aspect of the PPA was that it made permanent the retirement savings incentives enacted under the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA), including annual contribution limits for IRAs, Roth 401(k) plans, enhanced portability of retirement benefits, and reduced administrative burdens on plan sponsors. Without that support, all the gains made on those provisions would have fallen back. The PPA also made the Saver’s Credit permanent, as well as resolving legal uncertainty surrounding cash balance plans, and requiring DC plans to permit employees to diversify out of investments in employer securities if the securities are publicly traded.

The work is not done, of course. Innovative retirement income offerings continue to be introduced, but can’t seem to find traction, the focus on outcomes (these days generally under the banner of financial wellness) is still nascent, and the challenges of compliance with the DOL’s new fiduciary regulation lie ahead.

With so much progress made – and yet so much yet to be achieved – it may seem naïve in this exceedingly unusual election year to hold out hope that the nation’s legislative bodies could put their heads together and work together as constructively as they did just a decade ago.

But one can (still) hope.

- Nevin E. Adams, JD 

5 Things You Should Know About Target-Date Funds

In a remarkably short period of time, target-date funds have become an integral component of the typical 401(k) menu, and a growing share of 401(k) plan assets — particularly those of newly hired 401(k) plan participants — are being directed to TDFs.

Whether you are a plan fiduciary evaluating the TDF option(s) on your plan menu — or a 401(k) plan participant being defaulted into a TDF option — here are five questions to which you should know the answers about your TDF investment.

1. What is the ‘appropriate’ asset allocation?

This is the million-dollar question for target-date funds. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life — or than picking the firm(s) that you trust to know what that right mix is.

2. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds — particularly newer, smaller funds — the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are — and know if those targets are part of the current strategy.

3. Are the funds composed of proprietary offerings, or are they ‘open architecture’?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well.

Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set — not to mention the relative cost efficiencies of a proprietary product. There is no one single right answer, but the determination should be part of your evaluation.

4. How much does it cost?

Target-date funds are often constructed as a fund comprised of other funds, and — particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

Beyond the aforementioned “wrapper” fee, TDFs — particularly mutual fund TDFs — will generally have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes — and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

5. How should I measure ‘success’?

It wasn’t all that long ago that there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds). These days the passage of time, and the expansion of the market, have produced several credible benchmarks against which the performance of the funds can be evaluated.

But take note: The benchmarks can be as varied in their underlying philosophy and construction as are the funds themselves. That’s why it is important to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

- Nevin E. Adams, JD

You may also want to check out the Employee Benefits Security Administration’s (EBSA) “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries” at http://www.dol.gov/ebsa/newsroom/fsTDF.html.

A Second Opinion on "Self-Medicating" Your 401(k)

At a recent event, one of the speakers was taking our industry to task for expecting too much from participants. “We don’t expect individuals to diagnose and treat their own illness,” he said, going on to note that with 401(k)s we expect people who don’t have any knowledge or training in investments to decide how to invest those balances.

Admittedly, those 401(k) investment decisions can be complicated for some — and, since it (mostly) is their money, after all, most do give individual participants the ability to decide how it will be invested. As nice as it would be if individuals were exposed to the basics of finance — saving, budgeting, investments — sometime in their lives ahead of that workplace plan enrollment meeting, or the pages of that 401(k) enrollment kit, that’s not the current system’s fault.

In reality, individuals are routinely asked to make decisions on things in which they have no real knowledge or training. On numerous occasions, I’ve had plumbers and mechanics ask me to make decisions to either replace or repair enormously expensive systems with no ready information other than the explanation of the alternatives from the professional who is asking me to make that decision. A professional who, in some cases, has a relationship dating back only to the point in time at which his or her name was gleaned from the Internet (or Yellow Pages). Fortunately, most of those decisions aren’t matters of life and death, even if there is all-too-frequently a certain urgency to them.


However, the event speaker’s assertions notwithstanding, while we may not expect individuals to accurately diagnose their illnesses, we do ask them to make decisions on complicated matters in which they lack expertise. For example, several years back, a friend of mine received a troubling diagnosis from his regular physician. Now the area of concern was beyond the particular expertise of that doctor, so he suggested that my friend seek the opinion of a specialist. He did, only to find that the specialist’s opinion directly contradicted that of the doctor he knew and trusted.

Now my friend had to make a decision — and one in which he had a vital interest — even though he lacked the personal expertise to fully evaluate and appreciate the options.

Keeping up with a 401(k) isn’t like when the plumbing starts to leak, or the “check engine” light comes on — clear signals that there is a problem that requires prompt attention. For the most part, retirement investment and planning issues are less obvious, though even that hardly makes them unique. My friend’s serious medical situation was diagnosed only because he had gone in for a checkup because he was of an age where you schedule them whether you think you need one or not.

Similarly, you don’t need to be a financial expert to manage your retirement savings — you just need to have the common sense and discipline to schedule regular financial checkups with someone who does.

- Nevin E. Adams, JD

"Left" Overs

On more than a few occasions in my youth, I would misplace some object of importance. Generally it was just something I set aside for just a moment in pursuit of some more interesting endeavor—and sometimes it was something I set down and forgot about until much later.

Regardless, being unsuccessful in locating the object, I was frequently inclined to suspect that the culprit responsible for the disappearance was my mother, who—as mothers do, spent more than a little of her existence picking up objects that had been left unattended in unsuitable places. There were, however, times when she had played no role in the “disappearance,” and she’d admonish me to look more diligently—that “it didn’t just get up and walk away on its own…”

Now, while there were times when I was certain that the object in question had done just that, once I was able to retrace my steps, to recall where I had been and when—and, inevitably, there it was.
That said, I wasn’t always happy to find things where I left them; comic books don’t hold up well in the rain, for instance, and fragile objects left in the reach of younger siblings (or pets) can have a frustratingly short shelf life.

Retirement plan sponsors, and those who support their efforts, have worked long and hard to engage participants with the management and oversight of their retirement plan balances, with mixed results. However, even the most engaged participants seem to struggle to find the time, inclination, or discipline to revisit those initial investment choices, much less to do so at the appropriate times. In fact, left to their own devices, it’s likely that many—perhaps most—retirement plan participants looking to see how their balances are invested would find them right where they “left” them at that initial enrollment meeting (though with proportions shifted by the markets in the interim).

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target date of his or her retirement.

Though their mark was being made prior to the sanction of the design as a qualified default investment alternative (QDIA) in the Pension Protection Act of 2006, target-date fund availability and usage have soared along with the ensuing expanded adoption of automatic enrollment. Indeed, nearly three-quarters (72 percent) of 401(k) plans in the EBRI/ICI 401(k) database included target-date funds in their investment lineup at year-end 2012, and 41 percent of the roughly 24 million 401(k) participants in that database held target-date funds. Among participants who were offered target-date funds as a plan option, 60 percent held them at year-end 2012, and target-date fund assets represented 22 percent of the assets of plans offering such funds in their investment lineups.

Reflecting the growing popularity of automatic enrollment, at year-end 2012, nearly 54 percent of the account balances of recently hired participants in their 20s were in balanced funds (a significant subset of which is in target-date funds), compared with 7 percent in 1998. Moreover, at year-end 2012, 43 percent of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 40 percent at year-end 2011.

The impact of these shifts, chronicled in the extensive EBRI/ICI 401(k) database, is already manifested in the increasingly diversified portfolios of newer hires and younger participants. Beyond that initial allocation decision, the TDF design incorporates an ongoing rebalancing over time, one that shifts the underlying portfolios such that they are less focused on growth and more focused on income over time—a rebalancing that occurs automatically, and without requiring the input or involvement of the participant-investor.

That is likely to have a significant impact over time, because with retirement investments, as with life, we often plan to come back and revisit our choices more often than time (or life) allows.

Nevin E. Adams, JD

“401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012” is available online here.
In 2011, an EBRI Issue Brief provided an informative examination of the use of target-date funds (TDFs) by a consistent group of 401(k) participants in plans that offered them in 2007 through 2009. See “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007–2009,” online here.

"Freedom" From Choice?

You may remember little else about the 1989 film “Field of Dreams,” but odds are you have invoked a version of what is likely its most famous quote, “If you build it, they will come.”

Unfortunately, for many, building retirement savings is more complicated than constructing a baseball diamond in the middle of an Iowa cornfield. Most experts will tell you that the most important decision in retirement saving is deciding how much to save, not how those savings will be invested―and yet, for years, much of the education and discussion about retirement saving has been focused on investing.

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target-date of his or her retirement. Perhaps more importantly, that apportioning is automatically rebalanced over time, as the target date approaches, becoming less focused on growth and more focused on income over time. It’s an approach to which individuals and plan sponsors alike have come to embrace with little of the reluctance that often accompanies new retirement plan designs; one that runs counter to decades of expanding retirement plan menus and education designed to help participants make better use of those choices.

Consider that 72 percent of the more than 64,000 401(k) plans in the EBRI/401(k) database, included target-date funds in their investment lineup at year-end 2011,¹ and that nearly 4 in 10 of the nearly 24 million participants in that database held target-date funds.² That’s sharply higher than 2006, the year that the Pension Protection Act of 2006 included target-date funds in its definition of qualified default investment alternatives (QDIA), when about 57 percent of plans included those offerings on their menus, and fewer than 1 in 5 participants held them in their account(s). Perhaps more significantly, at year-end 2011, 51 percent of participants in their 20s held target-date funds, compared with 32 percent of participants in their 60s.

Recently hired participants―those more likely to be automatically enrolled in their employment-based 401(k), and to have their savings automatically invested in a QDIA (frequently a target-date fund), were, not surprisingly, more likely to hold target-date funds than those with more years on the job: At year-end 2011, 51 percent of participants with two or fewer years of tenure held target-date funds, compared with 37 percent of participants with more than five to 10 years.

In fact, an August 2011 EBRI Issue Brief noted that, among consistent participants in the EBRI/ICI database who were identified as auto-enrollees in 2007, 97.2 percent were still using TDFs in 2008, and 95.7 percent used them in 2008 and 2009. Even among those not identified as auto-enrollees, just over 90 percent continued to use them from 2007‒2009 (see “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007‒2009,” online here).

Now, one can find fault with the target-date design: There are different views on what is an “appropriate” asset allocation at a particular point in time; discrete perspectives as to what asset classes belong in the mix; notions that individuals aren’t well-served by a mix that disregards individual risk tolerances; arguments over the definition of a TDF “glide path” as the investments automatically rebalance over time; and even disagreement as to whether the fund’s target-date is an end-point, or simply a milepost along the investment cycle. That said, and as the EBRI/ICI data show, target-date funds, as well as their older counterparts, the lifecycle (risk-based) and balanced fund(s), have become fixtures on the defined contribution investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and those that guide them, are likely to be an important aspect of building their retirement future.

Of course, the future they’ll build will likely be better if those investments are properly used, carefully monitored, better understood―and funded by the appropriate amount of savings.


Nevin E. Adams, JD

¹ See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” online here.

² In addition, 20 percent of the participants in the EBRI/ICI 401(k) database held non–target-date balanced funds, and 3 percent held both target-date and non-target-date balanced funds at year-end 2011.