Two-thirds of a trillion dollars have been invested in creating a glide path to retirement through target-date funds, but that investment industry-promoted soft landing is not needed and actually counterproductive.
So argues Research Affiliates researcher Noah Beck in the Newport Beach, California, firm’s November newsletter, expanding on the previous month’s critique of target-date funds by firm founder Rob Arnott and researcher Lillian Wu.
Target-date fund assets have swelled ever since the government sanctioned TDFs as qualified default investment options (QDIAs) for retirement plans.
The portfolios automatically shift from more aggressive equity holdings for younger workers to more conservative bond holdings for workers nearing retirement. That allocation reflects the conventional wisdom that a younger investor has a longer time horizon and should therefore assume greater risk in order to boost long-term returns. Those on the cusp of retirement cannot expose their portfolios to such volatility, traditional thinking holds.
Arnott and Wu had argued that this conventional wisdom ignores empirical evidence that younger workers with less secure employment and scant savings are far likelier to raid their retirement accounts to meet basic living expenses.
Since they’re also more likely to lose their jobs in a recession, which in turn is likelier to occur following a market crash, younger people who accept the conventional wisdom and invest in risky assets will end up redeeming shares when they’ve fallen in value, in addition to paying taxes and penalties.
Thus target-date funds force the young to gamble away their safety nets. To this grim picture, Beck adds a further critique of TDFs, arguing that they’re founded on the false assumption that they represent the totality of an employee’s retirement funds.
A broader view of a worker’s assets and income reveal the existence of a natural glide path common to both millennials and boomers that TDFs dangerously distort.
So, for example, data show that the largest source of an average retiree’s income—over 35%—comes from Social Security. In investment terms, inflation-adjusted Social Security income functions very much like TIPS.
Add pension distributions, which make up over 17% of the average retiree paycheck, and now you have over 50% of retiree income sources with bond-like characteristics.