Near-Retirement Individuals Failed by Target-Date Funds: Sponsored by Mickey Elfenbein

As per Mickey Elfenbein, with all the uncertainty in the market currently, it’s fair to say that Baby Boomers are being hit hard. With around 73 million born between 1946 and 1964, a significant portion has retired already…but not everybody. For many on the edge of retirement, they face a difficult time ahead. However, you could say that the situation is even direr for those born between 1964 and 1980 – the so-called Gen Xers.

Across the past two decades alone, the two generations have now suffered three major setbacks in their retirement plans. The longer the current situation continues, the worse the result too. Why? For one reason, target-date retirement funds, described by Mickey Elfenbein.

For many Gen Xers and Baby Boomers, these funds have become to go-to in recent times. As the individual nears retirement, the allocation to stocks decreases. According to Mickey Elfenbein, however, even those who plan to retire in 2020 can still have as much as 50% of their asset held in stocks. According to Sway Research, these types of funds hold assets to a value of $1.8 trillion; the majority of this comes through 401k plans (workplace defined contribution).

While 37% of the market is taken by Vanguard Group, around 25% belongs to T.Rowe Price and Fidelity. Considered the ‘Big Three’, these companies now control almost two-thirds of the market (and two-thirds of all target-date funds).

The Problem in Numbers

Mickey Elfenbein said to the month ending March 20th, target-date 2020 funds from the biggest three companies lost value to the tune of around 20%. Even after a small rally shortly after, they’re still down by 13% on their highs. Depending on the company, the reliance on domestic and international stock changes. For example, T.Rowe Price has 58% tied up in equities while Vanguard has 50%. For those who plan to retire a little way down the road, between 59% and 64% remain in stocks.

On the face of it, the logic makes sense in that investors need to generate wealth over some time as life expectancy increases (the retirement period gets longer, and we need more funds to survive). This is no comfort to those who are retiring now, though, who have 50% held in stocks. As well as having the right annuity, experts recommend that investors keep fewer stocks or at least have two years of living expenses as cash.

Mickey Elfenbein said this isn’t a new problem, and it’s thought that IRAs (individual retirement accounts) for the average American have 50% of their value tied up in stocks; this increases to 55% when considering the percentage of balanced funds owned. If we look at research from the Employee Benefit Research Institute, we see that the percentage tends to drop after reaching 60 years of age. Yet, it still sits between 47% and 55%.

If you’re worried about your retirement having such a reliance on stocks, you aren’t alone. For the longest time, some financial experts have warned against the practice, and this includes Target Date Solutions president, Ronald J Surz. With the zone of risk coming in the five years before retirement, Surz believes that the aim of investing should switch from ‘accumulation’ to ‘preservation’. He says that retirees are often forced into tightening the purse strings due to the ‘sequence of returns’.

In a recent interview, Surz stated that people in this so-called risk zone are taking risks that they’re unaware of and probably can’t afford to take. As has been suggested through research by Michael Kitces and Wade D Pfau, an alternative plan would be the following:

Accumulate wealth as normal in younger years
Reduce equity percentage to between 20% and 40% while in the risk zone
Slowly and carefully increase equity exposure once in retirement

With this system, Americans can survive any unexpected world events while also enjoying a sustainable income while in retirement. Evidence of this strategy’s success comes with the SMART Target Date Fund index used by Surz, which, in sell-off, lost just 2%. This being said, the long bull years did start to weigh heavily for the index.

According to Mickey Elfenbein, elsewhere, we can find target-date funds from John Hancock that are more reserved and lost 5% less than the Big Three. Sadly, we’re in a situation where investors have no choice where their money goes. Instead, the employer chooses a 401k provider, and the majority choose one of the Big Three because of their reputation and dominance over the market.

We aren’t saying that target-date funds don’t have their merits because they can help individual investors who lack experience and judgment, but the current climate should lead the Big Three into an extensive rethink. Surely there’s a way to accumulate retirement funds without the risk of a huge downturn when the economy hits a rough patch (even if this rough patch couldn’t have been foreseen)?

Near-Retirement Individuals Failed by Target-Date Funds: Sponsored by Mickey Elfenbein