America’s working class is facing a crisis. Long gone are the days of defined benefit plans and guaranteed retirement security. Employees have been left to fend for themselves when it comes to saving for retirement and how to do it.
Armed with a simple 401k menu of various mutual funds and target date funds your employees are often going to their cubicle partner, best friend, brother in law, etc asking for advice on what to invest in and how much. It should be no surprise that mistakes are being made on a grand scale and the complaints to human resources, at least anecdotally, are rolling in along with the lawsuits.
A response to this problem has been the creation of target date funds and plan sponsors are including these options in an effort to address this problem. These funds are a one-stop shop for the plan participants that have a diversified mix of investments held within them that adjust their allocation based on age. These funds follow the old wisdom of moving from equities into fixed income as a person ages. This idea is meant to preserve gains and reduce risk as one nears retirement.
Unfortunately, markets do not care about an individual’s age. Interest rates have been at all time lows for 8 years now and are unlikely to rise to any rate that will provide an income stream anticipated with classical asset allocation models. So while target date funds in concept are a useful response to helping plan participants invest intelligently for retirement, it ultimately is going to leave many people underfunded and unprepared when they reach their golden years.
There has never been a better time to make the argument for professional management in retirement plans. Plan participants are under-educated with little time to spare, markets are in constant flux, and plans now face increased scrutiny and fiduciary responsibilities.
An option that plan sponsors should consider is the model portfolio. Building off the target date model and adding active elements to it help address the problems of target date funds. Model portfolios take into account a participants risk tolerance, need, goals, can be custom tailored and made to adjust to market conditions as well as retirement age.
As time marches on and as your employees realize they aren’t doing enough and don’t know what to do we believe you will see more and more participants asking for professional guidance and management to help them reach retirement goals.
If you’d like to learn more about model portfolios, or how to address other problems within your defined contribution plan please contact us here.