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

Target-date funds are designed with some level of investment risk that declines over time as the target retirement date approaches. It is possible to design a safe target-date fund 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. Unfortunately, there is currently no generally accepted method of measuring TDF risk. This presents a challenge to policymakers, plan sponsors, plan participants, and financial advisers. The target-date fund industry today is analogous in many ways to the automobile industry of the 1960s. We note a number of issues that this analogy brings to light. The public policy discussion that occurred in the automobile industry then provides a useful framework for interested parties to discuss policy matters in the defined-contribution industry 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