I wound up on one of those "milk run" trains
that makes every stop along the way—and, trust me, there
are a lot of stops between Manhattan and "home."
To make a long story short, I decided to take a short
nap…and woke up just as the train was pulling away from my
station.
It wasn't a big "miss," mind you.
But that 15-minute nap cost me about two hours of time and
a lot of aggravation…and, of course, it could have been a
lot worse.
It seems that many things long taken for granted in our
business are today being subjected to a whole new level of
scrutiny, including the very efficacy of the 401(k).
The most recent "target" is, of course, target-date
funds—and the examiners no less than the U.S. Senate, the
Securities and Exchange Commission, and the Department of
Labor (see
More Details Given on EBSA/SEC Hearing on Target-dates
,
Senate Committee Takes Aim at Target-Dates
) .
That examination is not necessarily a bad thing, of
course.
The reality is that these offerings have quickly become a
de facto investment solution for the nation's prime
retirement savings alternative, and in the past couple of
years received nothing less than the official sanction of
the DoL itself (at the instigation of Congress via the
Pension Protection Act).
That said, these solutions have benefited hugely from their
simplicity.
What is sold is the concept: professional money management,
monitored and rebalanced over time.
And to some extent, that is also what is bought.
What's Being Bought
However, IMHO, there is something else that is being
bought, if only implicitly—the ability to not have to worry
about saving for retirement
(1)
.
With target-date solutions, and more specifically with
target-date solutions as part of an automatic-enrollment
strategy, we've been able to set aside many of the messages
we once viewed as essential to participant/investor
education.
We no longer have to teach participants about the
importance of asset allocation, the wisdom of "not putting
all your eggs in one basket" (quite the contrary, in fact),
nor the need to keep an eye on your investments and to
regularly rebalance.
The message today is, tell us your birth date and "we'll
take care of all that."
And so we have.
There are two problems with that approach as I see it.
The first is one of message—I think we may well have given
a fair number of participants a message, if only
subliminally, that they no longer need to worry about their
retirement savings because we've attended to their
retirement investing (
2
).
That, of course, can be easily remedied—an effort that will
doubtless be encouraged by the sustained market downturn
and its impact on investors of all kinds.
Still, for many, I'm sure the recent downturn has left them
feeling the way I did as I watched the train pull away from
my station.
The second problem is perhaps more insidious—and it is
that "problem" that I suspect regulators will be trying to
deal with next month.
It is quite simply that, at the moment, we have lots of
target-date funds on the market with nearly identical
names—but very different philosophies.
And, like it or not, in an age where we're selling "don't
worry about it"— somebody has to.
Personally and professionally, I would hate to see us
"fix" the problem by complicating the simplicity of a
target-date choice.
On the other hand, how can we continue to hold out a dozen
different versions of the "right" asset allocation mix for
a particular point in time without doing a better job of
articulating that those differences exist, and explaining
what those differences are?
What's a Target-Date?
I'd start by explaining "target-date."
Once upon a time, the target-date was widely understood as
being your retirement date, but more specifically, it was
the date on which you would stop accumulating money for
retirement and start drawing it down; and, yes, in most
cases that was focused on the year in which the investor
turned 65.
Of course, these days, the definition of retirement is less
precise; it's not always 65, for one thing, and a growing
number may leave a full-time career for a while and renter
the workforce a couple of years later.
Those kinds of changes, if not always in the control of the
individual participant, are at least things that he or she
is in a position to be aware of.
But for any number of target-date solution providers,
the target-date in their fund family name is only a mile
marker along the way, rather than the destination itself.
They have developed strategies that ostensibly take the
participant investor not only beyond that retirement date,
but, in some cases, to the date upon which they leave this
mortal coil.
Now, there's nothing wrong with that as a strategy if
the participant-investor understands that and appreciates
what that means.
On the other hand, if they think—as I am sure many do—that
the target-date is the end, the point at which they are
"done"— well, they could well wind up, as some surely have,
being taken beyond their intended station—with no easy way
to get back.
1
Now, I realize as well as anyone that you don't
invest your way to retirement security.
But we also know that most participants tend to
concentrate on the things they can't influence (picking
investment funds, market trends, the availability of a
company match) rather than their rate of
saving—ironically, the one thing that they can, subject
to certain economic realities, control.
2
While automatic-enrollment programs are clearly an
effective means of getting workers to save for
retirement, I've worried in this column previously that
it might also insulate them from these issues
(see
).