Rethinking Target-Date Fund Risk

John Ruth, with Build Asset Management, says low fixed-income returns and a need for more customization calls for more evaluation of and new solutions for target-date fund investments.

In a letter to the head of the Government Accountability Office (GAO), Comptroller General Gene Dodaro, dated May 6, Senators Patty Murray, D-Washington, and Bobby Scott, D-Virginia, stated:

“The employer-provided retirement system must effectively serve its participants and retirees, and we are concerned certain aspects of TDFs [target-date funds] may be placing them at risk. TDFs are often billed as ‘set it and forget it’ investments, yet expenses and risk allocations vary considerably among funds. The millions of families who trust their financial futures to target-date funds need to know these programs are working as advertised and providing the retirement security promised.”

The two lawmakers proceeded to lay out 10 intensive questions designed to get at the root of how much risk plan sponsors are exposing their defined contribution (DC) members to by holding investments in TDFs.

This shines light on one aspect of how woefully unprepared many Americans are for retirement: The fact that, without the average investor’s knowledge, many of the fixed-income components of their long-worked-for retirement plans—including the 40% component of the classic 60/40 portfolio mix—are losing so much value that they’re becoming a risk. This includes TDFs and other passive forms of glide path investing.

The fallout from the current state of interest rates and looming inflation is such that the decades-old comfort level in long-term, fixed-income-type investing has ceased to exist. Bonds are now yielding near zero percent. There’s even a salient argument to be made that, factoring in inflation, the net real yield on some of today’s more popular fixed-income proxies is actually negative. Unfortunately, it’s unlikely to return to any sense of historical normal in our working lifetime.

But there may be some new ways of thinking about the problem. As the senators point out in their letter, there is a common misconception that all TDFs are the same. However, there’s nothing in the statute that requires TDFs to be arranged in groups of 10 or to be created around five-year intervals.

Conversely, not all funds that target the same date are equal. On the contrary, that is rarely the case. From one fund company to another, there’s considerable variation regarding how the products within the portfolio change—and we believe there are many innovative approaches that can use this fact to turn TDFs back into a positive.

Similarly, there is also a static set of assumptions that all 50-year-old retirement investors have the same needs. I’ve never found this to be the case in reality, as we see different rates of deferral, risk preferences and other investment benchmarks as a matter of course among this midstream group of retirement investors.

New thinking—and more specifically, innovation and competition—is needed to help overcome these misconceptions and hurdles. The current changing economy and investment environment call for these three actions, to start:

  1. We must realize we’re way behind where we should be. Plan sponsors and advisers alike need to recognize now that we are a long way away from the desired outcome of getting employees successfully to a dignified, solvent retirement.
  2. Plan sponsors should take evaluative, customizable action. It’s urgent for employers to get actively involved in evaluating TDFs and other glide paths for their employees, understanding that their employees are individuals and do not all fall under the same category. Therefore, some customization and individualization will be called for in their approach to employees’ retirement paths.
  3. We need to educate the consumer and the employer. All stakeholders need to know about the concerns we’ve discussed here—the educated consumer’s voice will allow the plan sponsor to ask intelligent questions and try to find the right mix for their employees.

The investment industry needs to find competitive, innovative solutions that aim for a middle ground between more exposure to equities and overexposure to fixed-income assets that have a low or net negative return. While it’s good news that Congress and the Department of Labor (DOL) are moving toward more clarity on TDF’s underlying investments, as an industry, it’s time to explore a different approach to our 15-year financial experiment in glide paths and target-date funds—for the sake of our retirees.


John Ruth is co-founder and CEO of Build Asset Management, an asset management firm specializing in strategies focused on fixed income and options. He can be reached at

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.