TITLE

Unsafe at Any Speed? The Designed-In Risks of Target-Date Glide Paths

AUTHOR(S)
Bodie, Zvi; Fullmer, Richard K.; Treussard, Jonathan
PUB. DATE
March 2010
SOURCE
Journal of Financial Planning;Mar2010, Vol. 23 Issue 3, p42
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• The U.S. Department of Labor currently lists target-date funds (TDFs) as a qualified default investment alternative (QDIA) for defined contribution retirement plans, but this is under review due to recent poor performance. • TDFs are designed with some level of investment risk that declines over time as the target retirement date approaches. This is usually accomplished by altering the asset allocation according to a predetermined schedule over time. The "glide path" of the investment risk level varies considerably among TDF providers. • It is possible to design a safe TOE in terms of market risk—although in terms of meeting a target level of wealth at retirement (or income in retirement), it would only be safe if matched with a large enough contribution (employee savings) rate. • There is currently no generally accepted method of measuring TDF risk. This presents a challenge to policymakers, plan sponsor, plan participants, and financial advisers. • The TDF industry today is analogous in many ways to the automobile industry the 1960s, and we note a number of issues that this analogy brings to light with regard to QDIA policy matters. The public policy discussion that occurred in the automobile industry then provides a useful framework for interested parties to discuss QDIA policy matters today. • Risk measurement is not a simple matter. To be useful (and not harmful), the risk measure must be scientifically sound. We discuss the desired attributes of such a risk measure and propose that a standardized method of disclosure and risk measurement would be beneficial to consumers.
ACCESSION #
48538137

 

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