IMHO: When You Assume…

Well, over the past couple of weeks, I’ve heard a lot of discussion around target-date funds, most recently at the PLANADVISER National Conference (PANC).  Without question, plan sponsors and participants—and perhaps not a few retirement plan advisers—were caught off-guard by the varied designs and resulting experiences of these popular investment offerings in recent months². 

That many participants assumed these offerings were a no-maintenance solution to their retirement security is understandable, IMHO, certainly in view of how they were promoted by their manufacturers, sanctioned (from a design standpoint, anyway) by regulators, and positioned on retirement plan menus.  But let’s face it, what happened in the markets last fall happened pretty much everywhere and to everyone (at least everyone who was invested in the markets). 

And, while there’s no way to truly quantify this, my sense is that some of those 2010 participants who were, unfortunately, caught in that market maelstrom were nonetheless well-served in the months ahead of that downturn, and perhaps since, by having their savings invested in a truly diversified portfolio.  

There remains, however, the “smoking gun” issue—what DID participant-investors “know,” and when did they know it?  Or, perhaps more precisely, when SHOULD they have known it?  That and, were they really given the information they needed to know it? 

“To” Versus “Through” 

The “to” versus “through” retirement debate—the notion of whether the target date is an end point for target-date investment or merely a point along the investing continuum—remains unresolved in target-date circles.  Frankly, I have heard arguments (some better than others) on both sides, and, personally, I see no reason that informed and educated investors shouldn’t be able to make their own determination as to the approach that best suits their situation. 

What troubles me—aside from the reality that offerings so different in composition, design, and intent have names that are disquietingly similar—is that the assumptions underlying the glide path are so often unarticulated.   

I’m not talking about the relative mix of exotic asset classes, or the soundness of the balance of equities and fixed-income investments at the date of retirement (or decumulation), though both are impacted.  No, I’m talking about the implicit assumptions these various strategies employ to develop those glide paths that purport to deliver on the promise (or premise) of adequate retirement income.  Assumptions regarding the age at which investors will truly begin drawing down those savings and at what rate, and—most significantly—assumptions about the accumulation from which they will be working. 

See, to me, if you’re promoting an approach that assumes that you will have a certain amount saved, you need to tell people what that amount is.  Alternatively, if you are backing an approach that assumes a retirement saver won’t have what is “needed,” but hopes to shore up some of that shortfall, it seems to me that you should be upfront about that as well.  IMHO, for all the focus on asset allocation as the be-all-and-end-all of the target-date debate, it’s the assumptions that underpin—or undermine—those decisions that are at the heart of the matter. 

Ultimately, whether you are a plan fiduciary or a participant-investor, it seems to me that you can’t—and shouldn’t—make a target-date fund decision until you fully understand what is being assumed—and until you have matched those assumptions with the reality of your particular situation. 

Because, as we all know, when you assume…. 

² It is certainly worth noting that PLANSPONSOR/PLANADVISER is hosting a conference devoted to the subject of asset-allocated fund solutions next month.  See http://www.plansponsorinstitute.com/faaf09west/