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Is Your TDF Off Target!?

By Jack Towarnicky

A cruise missile will invariably hit its target after traveling at subsonic or supersonic speeds covering 500 to more than 1,000 miles, despite the fact that it weighs up to 1,000 pounds1! As a plan fiduciary, what’s the accuracy of the target date investment you selected for your participants?

Join Ron Surz, president of Target Date Solutions and Neil Lloyd, partner of head US DC and financial wellness research at Mercer will present: “Target Date Funds: Should We Be Satisfied With What We Have?” at PSCA’s 2019 National Conference, April 30-May 1 in Tampa, FL.

Let’s say you selected target date funds (TDF) with a target date of age 65 on Oct. 24, 2007, the day the DOL finalized qualified default investment alternative (QDIA) regulations. During this time, anyone automatically enrolled was defaulted to the appropriate TDF based on their date of birth. Two workers, both hired and automatically enrolled on Oct. 24, 2007, were invested in the same 2020 TDF:

  • Mr. X, born Jan. 1, 1953, with no other accumulated retirement benefits, was hired to work as a millwright, earning a yearly salary of $50,000. He was in relatively poor health, married with an unemployed spouse and two teenage children. He was a risk-averse investor with minimal investment experience. 
  • Ms. Y, born Dec. 31, 1957, had accumulated more than five times her annual earnings in retirement assets while working for other employers. She was the corporate treasurer, earning a yearly salary of $200,000. She was in perfect health, single and was an experienced investor with a high-risk tolerance. 

Now, take it forward 11.5 years to today, April 2019. As is often the case, neither participant updated their investment selection – both are still in the 2020 TDF, where:

  • Mr. X, now age 66, “retired” four years ago in 2015, commencing Social Security benefits on his 62nd birthday. 
  • Ms. Y, now age 61, plans to continue employment for nine more years until age 70 in 2027. She plans to defer commencement of Social Security benefits until then. 

Today, your advisor confirms that the 2020 TDF you selected as the QDIA should have an equity allocation of 54 percent – but, that is not disclosed anywhere, neither to you nor to your participants. Worse, because your TDF manager has discretion to make tactical investment decisions, it turns out that he is aggressively pursuing alpha (so his returns look good compared to other TDFs with lower target equity allocations). The current equity allocation for your 2020 TDF? Actually, it is at more than 60 percent!4

Make sense?

Given all of the recent investment volatility5 and our 2008-2009 track record6, is even a 50 percent or more equity allocation right for participants who have already retired or those, unlike Ms. Y, who plan on commencing payout in 2020? Check in with Ron and Neil; perhaps you should at least consider alternatives that would improve the transparency and the accuracy of the TDF investments you previously selected as the QDIA.7, “On May 11, the global average user range error was ≤ .715 m (2.3 ft.), 95% of the time. Military accuracy is more accurate than civilian accuracy. Accessed 4/13/19 at:
2Department of Labor, Employee Benefits Security Administration, Default Investment Alternatives Under Participant Directed Individual Account Plans; Final Rule, 29 CFR § 2550.404c–5, 10/24/07, Accessed 4/13/19 at:
3R. Surz, J. Towarnicky, Target Date Model Portfolios: A twist on the target-date fund approach. DC Insights Magazine, Fall 2018. “… All TDFs generally use age 65 as the target date — the date when payouts from the individual account retirement savings plan are expected to commence. However, there are noticeable differences among equity holdings at age 65 — Vanguard at 49%, T. Rowe Price at 55%, Fidelity at 55%. Also, many TDFs use a “through” retirement glide path where equity allocations don’t reach their minimum until long after the target date — Vanguard at age 75, Fidelity at age 80, T. Rowe Price at age 95.”
4Lee Barney, Responsible Approaches to Tactically Managing TDFs, 3/7/19. “… Francisco Gomes, professor of finance at London Business School, recently issued a report calling for tactical target-date funds to go a step further by relying on short-term market data based on variance risk premiums to adjust funds’ asset allocations on a quarterly basis and permit annual portfolio turnover as high as 213%. … Gomes’ back-tested theory would permit a tactical TDF to trade 10% of its portfolio either up or down to look for “anomalies within volatility in order to find alpha.” This range results in “a band of 30%. That is higher than most of the industry players—more than double the average …” Accessed: 4/13/19 at: See also: R. Martorana, The Use And Misuse Of Tactical Asset Allocation Funds, 1/11/12, Accessed 4/13/19 at:
5J. Towarnicky, Retirement Investing At The Summit – Investing When Equity Markets Are At All Time Highs, 11/30/18, Accessed 4/13/19 at:
6J. Towarnicky, Default Is Not Mine — I Only Live Here: Considerations regarding target-date funds as the plan QDIA. PSCA DC Insights Magazine, Winter 2017, Accessed 4/13/19 at:
7J. Towarnicky, Target Date Investments, 3/6/19, Accessed 4/13/19 at:

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