“Dating should be less about matching outward circumstances than meeting your inner necessity.” -Mark Amend (author)
For those readers with typical defined contribution retirement plans – like a 401(k) or 403(b) – you have likely noticed target-date funds listed among the available investment options. They have names such as Retirement 2045, Glidepath 2050, or Freedom 2055, and they are readily identified by the dates in their names. We know they are widely available, but are they useful? And, if we are going to invest in these options, are there better strategies than choosing a date closest to your planned retirement and then relegating it to a Ron-Popeil-Showtime-Rotisserie “set-it-and-forget-it” approach? Also, how might Alts figure into this picture? We’ll begin to explore all that and more in today’s Alt Blend. Here we go!
When you assume…
First things first: what all these funds are designed to do is “glidepath” someone into their retirement portfolio by adjusting the allocation as the big day approaches. That sounds innocuous on the surface, but I assure you it is vitally impactful on one’s long-term financial success and, thus, important that we do not gloss over it.
A 2045 fund “helps” me automatically reduce “risk” over time, largely by dialing down the percentage of stocks and increasing the percentage of bonds in the portfolio, with the assumption of a 2045-ish retirement date. Looking at real examples, on my screen is a common 2060 fund (retirement is ~35 years away) that has 90% stocks and 10% bonds. The 2025 counterpart to that fund has about 48.5% bonds (and 52.5% stocks), which is a material difference. In addition, the underlying composition of the stocks and bonds favors domestic and shorter-dated (bond) holdings as the retirement date draws nearer. In other words, if I start with the 2060 fund now, I should expect that – over the next 35 years – my allocation will move from 90% stocks to 50% stocks, along with a generally more conservative posture, in preparation for my retirement. So far so good.
That “retirement glidepath” is simply how target-date funds work, and it is intended to be a feature (actually, the feature), not a bug. I also understand how that notion sounds like a good thing to those who don’t live their daily life in the world of portfolio construction and retirement planning, but I’m here to point out the (perhaps less obvious) assumptions included in that glidepath approach. Those assumptions include:
- Everyone’s situation is the same.
- Holding fewer stocks and more bonds going into retirement is sensible and/or desirable.
- You will be using the “waterfall” approach to retirement income (i.e., more fixed income and short-term reserves may be needed to balance out the lack of equity income).
- The retirement date allocation (about a 50/50 mix in our example above) solves for your lifestyle needs.
Not reinventing the wheel
It’s not often I get to quote myself, but we covered the idea of “reducing risk approaching retirement” briefly last summer in the Brush, Rinse, Repeat? series:
Whereas you may be “punching out” for the final time after decades of hard work, our eternal foe, inflation, never sleeps. Although it may sound comforting to shift a portfolio from “risky” equities to “less-risky” bonds, collect income, and sail off into the sunset, that strategy could introduce far worse problems than market volatility. In particular, it significantly diminishes real growth potential and virtually eliminates the possibility for income growth, which will be needed to outpace inflation over decades of retirement.
And, to the point of today’s quote, I’m in the camp that it is better to design a portfolio to meet the needs of one’s particular circumstances rather than accept a solution designed to fit the general needs of the masses. I’m taller than average, and I am reminded throughout each day how many items are ergonomically designed for the “average” person (e.g., counter heights, sofas, bus seats, plane seats, etc.). There’s little I can do to change those things, but you don’t have to be the victim of “average” retirement planning solutions.
Facts of life
For my fellow elders in the room, I hope that title conjures up images of Tootie, Natalie, Jo, and Blair, and has you humming the unforgettable theme song of the ‘80s classic TV show, where “you take the good, you take the bad…” Though there are inherent (poor) assumptions and limitations of target-date funds, they also have some good aspects; in the spirit of our 2026 theme at TBG, it’s very much a situation of BOTH/and.
If an investor wants to be relatively aggressive in their retirement plan, then the target-date options pose a reasonable option: choose the date that is furthest into the future, and it will be nearly all equity. In addition, it will be a more balanced (arguably more responsible) equity exposure than people are likely to choose on their own. As the great advisor-mentor,
Nick Murray often reminds us, “Humans are a failed investor.” Show me the list of 401(k) options and which have performed the best in recent years, and I’ll show you which options people will select. If anything is true in this industry, it’s that past performance is not indicative of future results, and “best performers” change as markets evolve over time – yet people will reliably cling to that recent performance as their main factor for investment selection.
Target-date funds can be our ally by providing exposure to both large and small companies, as well as international developed and emerging markets; this mitigates investors’ tendency to chase the latest craze and bakes in the discipline to regularly rebalance into underloved market segments.
With that said, we’re now at a natural stopping point before we dive deeper into the composition of these solutions and where Alts may figure into all of this.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
