Plansponsor recently published a story about a study done by JP Morgan on how participants in 401(k) plans behave at retirement when accessing their savings. The study found, on average, participants withdraw their entire balance after just three years (just 17% of participants remain in the plan at this point).
Given the trend toward defaulting and encouraging participants to place their money into Target Date funds (funds that essentially manage a participants savings over their lifetime) it seems like a reasonable assumption that todays most popular target date providers would build such an assumption into their glidepath (glidepath describes how a portfolio moves from aggressive to conservative over the participant’s lifetime). That would be a mistaken assumption.
The majority of Target Date fund assets are with Fidelity, Vanguard and T. Rowe Price and all of them are quite aggressive at the retirement date (somewhere near 60% in stocks) and all of them continue to be aggressive throughout retirement. But if 83% of people are taking their money out of their retirement plan within three years of retirement, isn’t a portfolio that is 60% in stocks to risky? Would any prudent planner advise a person who needs their assets within a few years to have such a large allocation to stocks?
There are many things wrong with Target Date funds today, their aggressiveness being just one, they are a timebomb waiting explode and the destruction will be felt most by those who can least afford it – those who are retiring, about to retire or in retirement and have no more years left to work.
Scott Dauenhauer, CFP, MSFP, AIF