by Tom Parks
I read an article the other day on benefitspro.com whose headline thoughtfully pondered: “Are TDFs really the best QDIA? 4 other options for structuring retirement plans”. It’s precisely the sort of question you imagine 401(k) guys like me considering while navel-gazing around a hookah.
I mean no disrespect to the author of the article, because this conversation is a genuinely interesting one for industry insiders like me, but in my opinion, it’s purely academic. Besides, I’m not entirely certain that we’ll arrive at a solution to the challenges facing the American retirement system by answering if TDFs are really the best QDIA.
The key terms in this headline:
- “TDFs” refer to Target Date Funds, an increasingly popular one-stop-shop investment option available in 401(k) plans.
- A “QDIA” refers to a Qualified Default Investment Alternative. I’d like to focus on the “D” in QDIA.
- “default”: Merriam-Webster defines default as a “failure to do something required by duty or law : NEGLECT”
The article I read is essentially asking readers whether neglectful people who have failed to take action on their retirement are best served by a target date fund, as opposed to some other diversified investment option.
It’s like writing an article asking whether the guy who just jumped out of an airplane without a parachute should aim to land in a swimming pool or a stack of hay. Even if the article featured university physics professors diverging on whether the pool or the hay option provides a marginally lower likelihood of survival…shouldn’t we focus on the fact that the dude jumped out of the airplane without a parachute in the first place?
According to a recent bankrate.com survey, 20% of Americans aren’t saving any money for retirement and those between the ages of 55 and 64 have saved a median of only 12% of the amount recommended by experts. My finger math tells me that the marginal difference between an 8% rate of return versus, say, 10% on zero dollars invested comes in at around… zero. Even if you’re one of those people who has socked away 12% of what you need for retirement, a great rate of return alone will not close the gap.
My profession affords me the opportunity to talk with a lot of really smart people in my travels: CFOs, HR directors, presidents of companies and the rest. I get all sorts of questions about intricacies like the 3, 5 & 10 year rates of return on the small cap growth fund, and of course everyone wants to know how I can help them save 5 bps (if you don’t know what “bps” means check out my YouTube tutorial video).
But when I start talking about how we can encourage their employees to contribute more to the plan, statistics like the ones I cited above can make that conversation almost too burdensome to ponder. Where do we start?
Like Teddy Roosevelt famously said, “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty… I have never in my life envied a human being who led an easy life. I have envied a great many people who led difficult lives and led them well.”
Don’t be distracted by shiny objects, academic headlines, or frantically-moving furry little animals. Roll up your sleeves and help your employees start taking control of their retirement. Start by giving me a call. Our team includes eggheads like the people on our Annex investment committee who can worry about TDFs (wrapped or otherwise), hybrids and managed accounts – while key people on our team work with yours to make meaningful progress with your employees.