Target date funds have long been the default investment option for many 401(k) participants, offering a simplified, hands-off approach to retirement investing. But as Christopher Carosa recently highlighted in Fiduciary News, these funds may not be the best fit for near-retirees who need more than a one-size-fits-all glide path.
The challenge with target date funds is their fixed allocation strategy. While they gradually shift from equities to bonds as an individual’s retirement date approaches, they still leave participants exposed to market downturns—an especially risky proposition for those just a few years from retirement. According to Vanguard’s “How America Saves 2023” report, 60% of participants within five years of retirement rely on target date funds. However, a sudden market drop at the wrong time could significantly impact their nest egg, forcing them to withdraw funds at a loss.
So, what’s the alternative? Fiduciaries and plan sponsors need to explore more tailored strategies that address the specific needs of near-retirees.
Rather than defaulting to target date funds, plan sponsors can incorporate customized investment solutions that offer greater flexibility. Managed accounts, for example, allow participants to tailor their portfolios based on personal risk tolerance, cash flow needs, and retirement goals. These accounts dynamically adjust allocations, offering a more precise approach to balancing growth and preservation.
Another strategy is to introduce low-risk investment options such as stable value funds, money market accounts, or short-term bonds. These choices provide a safety net, helping retirees safeguard a portion of their assets against market volatility. Some plan sponsors are also implementing “retirement runway” strategies, where participants can gradually shift a portion of their investments into cash reserves as they approach retirement.
One key takeaway from Mr. Carosa’s article is that plan sponsors must do more than offer alternative investment options—they must educate participants on how to use them effectively. Many employees are unaware of the risks embedded in target date funds or the benefits of a diversified withdrawal strategy. Providing tools like retirement readiness reports, personalized forecasts, and interactive webinars can empower participants to make more informed decisions about their retirement portfolio allocations.
Ultimately, the responsibility falls on plan sponsors and ERISA fiduciaries to ensure that retirement plans serve the best interests of participants. That means moving beyond default options and offering investment solutions that better align with individual retirement timelines and risk profiles.
As more near-retirees seek greater control over their retirement savings, now is the time for plan sponsors to reevaluate their plan design. By incorporating managed accounts, stable value funds, and robust participant education, they have an opportunity to provide a more secure path to retirement.
