Boomers Abandoning TDFs at or Near Retirement

There are strategies to help retirees create a lifetime income stream that can reverse this trend.

In aggregate, across target-date fund (TDF) providers and funds, all vintage years between 2060 and 2020 experienced an increase in total AUM during 2016; however vintage year funds that had passed their target years experienced a decrease in total AUM, according to the March 2017 Target-Date Trends report from Mercer

Neil Lloyd, head of U.S. DC and Financial Wellness Research at Mercer, who is based in Vancouver, tells PLANADVISER Mercer noticed the same trend last year and it happens year over year. Pre-retirees and retirees are moving their money out of TDFs near or at retirement.

Lloyd notes that TDFs are designed for a homogenous group of people. “If you look at a 20-year-old with not much assets, it makes sense to invest assets highly in equities, but if you have one 60-year-old with $500,000 in assets and another with $2 million, the situation is more complex, and something more tailored to each situation makes sense,” he explains.

“We can’t say at a high percentage what the reason is, but we are pretty sure Boomers are moving their assets to IRAs,” he adds.

It stands to reason that some target-date fund investors may be leaving the products (and their workplace plans in general) in order to start formally structuring retirement income. In a recent conversation with PLANADVISER, centered on MetLife’s “Paycheck or Pot of Gold Study,” Roberta Rafaloff, vice president, institutional income annuities, suggested that the first wave of defined contribution (DC)-focused Baby Boomer retirement plan participants are now hitting full retirement age. The group is quickly setting and defining new trends in terms of how retirement wealth will be treated post-employment.

Lloyd predicts a change in the future. Mercer is seeing more plan sponsors encouraging people to keep assets in their plans. IRAs tend to be more expensive, and staying in the plan can help participants incur lower fees. In addition, he says, the conflict-of-interest rule from the Department of Labor (DOL) will make rolling over assets more challenging in the past and may encourage participants to stay in their plans.

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Lloyd says one possible explanation for Boomers taking their money out of TDFs is they are putting their assets into a payment strategy, but Mercer doesn’t really think that is the case.

Right now access to and information about in-plan lifetime income options is insufficient, Rafaloff argues, so it’s only natural for large numbers of plan participants to roll away from DC plans once they really enter retirement and stop earning new wealth.

“Given the longevity trends and the fact that DB [defined benefit] plans are increasingly a thing of the past, it is really our job as plan providers and plan sponsors to push DC plans to be better retirement income vehicles,” she says. “That will obviously include pushing for more investment options that proactively include retirement income planning elements, whether as stand-alone annuity options or even better as part of the qualified default investment alternative.”

Rafaloff notes that guidance issued by the DOL and Internal Revenue Service (IRS) in 2014 formally permits DC plan investment options such as target-date funds to include income annuities as part of their fixed-income holdings (the annuities may even provide payments to the shareholder either immediately upon retirement or at a later time). Yet, there has still been relatively little product development in this area. Adding to the issue, plan sponsors lack the confidence to investigate and implement such innovative approaches where they do already exist.

Rafaloff and others say this is somewhat perplexing, as the DOL even specifically confirmed that TDFs serving as default investment alternatives may include annuities among their underlying fixed-income investments, describing in detail how Employee Retirement Income Security Act (ERISA) fiduciary standards can be satisfied when a plan sponsor appoints an investment manager that selects the annuity contracts and annuity provider to pay the lifetime income. And so there really is no reason plan sponsors should feel their participants would be better off moving away from the DC plan setting upon retirement, Rafaloff feels. All the ingredients are in place for sponsors and providers to do better on the lifetime-income-from-DC challenge.

"Again in the DC context, it becomes really important to remember it’s not an all or nothing offer. Plan sponsors can find innovative ways to offer partial annuitization within the DC plan and really create a customized income solution that makes sense for the plan population," she concludes.