What’s inside your retirement plan?   That’s a question every boomer should be asking these days, according to Ron Surz,  of Target Date Solutions and the Baby Boomers in Jeopardy newsletter.  Surz has patented a “safe glide” strategy that he says will better protect retirees from the risks inherent in most Target Date Funds.

For two decades, target date funds inside company 40l(k) plans have served as the default “safe haven” investment, so they now hold more than $3.5 trillion of company plan assets.  The initial goal was to provide a diversified portfolio of investments for novice plan participants.   They chose their target retirement year, and invested in the fund that matched that goal.  The emphasis was on equity and growth for younger workers, transitioning to a professionally-managed, “safer” portfolio with less equity exposure as the worker neared retirement.

But that’s not the way it worked out.  While major mutual fund companies that provide the plan investments differ in their target-date fund asset allocation, overall these plans maintain a high degree of risk as they reach the “target date” of retirement, according to Surz.  In fact, he notes that with an average 55% allocation to stocks, and another 30% allocation to long-term bonds (whose prices fall when interest rates rise), these portfolios typically contain 85% risk exposure.

Surz notes that most retirees just coast along, in the belief that the professional money managers of these Target Date Funds have their best interests at heart.  But those allocations in most 40l(k) plans are far more aggressive than the Federal Thrift Savings plan at that stage of life, with 70% in safe government guaranteed assets.

What’s the Risk?

In 2022, an unusual year in which stock prices fell along with bond prices as the Fed hiked rates, those portfolios sustained huge losses.  Now the Fed is more likely to be cutting rates, boosting bond prices in the year ahead.  But another spurt of inflation could result in losses in both stocks and bonds.

When big losses occur at the start of retirement, they greatly impact future retirement income and withdrawals.  No longer are the retirees taking advantage of buying shares at lower prices, in anticipation of a bounceback.  Instead, during retirement these losses impact a retiree’s ability to fund annual expenses.

It’s a matter of the “odds” – not just market forecasting.  The market continues to make new highs, and advance after setbacks.  But the huge balances in 40l(k) accounts at market highs are not guaranteed.

Congress has asked the General Accounting Office why the government thrift plan is so much more conservative than most corporate TDF accounts.  But In April 2024 the GAO released 401(k) Retirement Plans: Department of Labor Should Update Guidance on Target Date Funds , the passing the buck to the Labor Department, which oversees company retirement plans.  So far, the Labor Department has refused to deal with the issue.

What YOU Should Do?

Since no one is insisting Target Date plans fully disclose their combined stock and bond risk exposure at the targeted retirement date, it is up to you – the plan participant – to understand that these funds could be hazardous to your wealth if the stock market falls sharply.  It’s not that you should sell out of stock market exposure; you’ll need it over the long-term of your retirement to offset the ravages of any future inflation.  But you need to understand your exposure to potential loss – and make sure you have other, less risky, investments to offset this exposure.

If you “roll out” of your company plan at retirement, you’ll be in the position of choosing new investments, which will require you to analyze the portfolios of any target-date funds you might choose.  As well, a rollover will give you exposure to government-only money market funds for a portion of your account – making RMDs easier, and letting you sleep better at night.

But if you haven’t retired yet and so must stick with the company plan options, or if you chose to leave your funds in the company plan after retirement, now is the time to look inside your plan and ask “what’s in your wallet” – and make sure you understand your exposure to stock market risk, before it’s too late.  That’s The Savage Truth.

PS:  You might also be interested in this recent column:  Dangerous Stock Market Complacency? – Terry Savage