(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO May 27 If you contribute to a target
date fund in your 401(k) plan, you probably have a sense of how
it works. The fund's balance between stocks and bonds
automatically shifts as you age, with less weight on equities as
you get close to retirement.
But it's important to read the fine print on these funds,
because their allocations aren't all alike on the "target date"
- the day you retire. Some firms that manage target date funds
(TDFs) adhere to a "to" glidepath - meaning the funds reach
their most conservative allocation on the target date. But the
industry's biggest players use a "through" glidepath, meaning
that the most conservative position is reached well after
The difference is important. The "to" glidepath provides
greater protection against losses in a market downturn, but the
"through" glidepath boosts the odds of stretching your nest egg
longer into retirement. Understanding that difference will
matter to a growing number of retirement investors in the years
ahead. The popularity of TDFs is soaring, with $618 billion
invested at the end of 2013, according to the Investment Company
Institute - up from $160 billion in 2008.
Glidepath design is a topic of ongoing debate in the fund
industry. The latest flareup came when BlackRock, the giant
asset management firm and a key proponent of "to" glidepaths,
published a paper earlier this month making the case for its
approach. The argument rests on the notion that your "human
capital" - that is, your ability to earn income - is exhausted
on your target date, so there is no reason to be taking more
market risk on that date than later in retirement.
"The day that you retire is the riskiest day of your life,"
says Chip Castille, head of BlackRock's U.S. retirement group.
"You're no longer earning, and it's the point when you still
have the longest investment horizon and your account balance is
likely to be at its highest point, which means any loss you have
will be applied to a greater asset base."
Note that this argument isn't about your allocation to
stocks and bonds, but how it changes over time. "We aren't
saying what your level of equities in retirement should be,"
Castille says. "If you think stocks will give you high return at
low risk, hold a lot of them. But there's no reason to keep
gliding past the date of your retirement."
Advocates of "through" glidepaths focus on longevity risk -
the danger of exhausting resources in retirement. That's a
looming issue for a growing number of households, since fewer
retirees will be able to rely on guaranteed lifetime income from
defined-benefit pensions in the years ahead. The value of Social
Security payments also is projected to fall in the coming
decades, the result of reforms enacted in 1983.
Research by Morningstar underscores the importance of
longevity risk. "Given lower saving rates and the decline of
defined-benefit plans, a growing number of people can't really
afford the more conservative approach," says Janet Yang, senior
mutual fund analyst at Morningstar. "You can either guarantee
you won't have enough and go conservative, or you can have the
possible upside of higher stock allocations, which gives you a
chance of having enough to last through retirement."
Morningstar's research found that "to" and "through"
allocations both can meet retirees' spending needs up to age 85.
At that point, results start to diverge. By age 95, 45 percent
of investors in "to" glidepaths will exhaust their savings; only
40 percent of investors in the "through" glidepath will deplete
their savings by that age.
Glidepath isn't a matter of choice for TDF investors in
401(k) plans; the investing philosophy is determined by the plan
provider chosen by your employer. The industry is roughly
divided in half on this issue but tilts heavily toward "through"
glidepaths measured by assets under management. The three
biggest TDF asset managers - Fidelity Investments, Vanguard, and
T. Rowe Price - all use "through" glidepaths. Together, these
three manage 75 percent of all TDF assets, according to
But it's worth knowing how your plan has you gliding at
retirement. If you're not comfortable with the path, you can
always move out of the TDF into other fund options. You can
manage the allocation yourself, or with the assistance of a
financial adviser. "People should be asking what the fund is
designed to do," Castille says. "Does it do what I need it to do
or not? And if not, make an adjustment."
For more from Mark Miller, see link.reuters.com/qyk97s
(Follow us @ReutersMoney or here.
Editing by Douglas Royalty)