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Pinpoint the right target-date funds strategy for clients

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There is a shortlist for life’s certainties: death and taxes. And TDFs.

OK, it might be a bit of a stretch to add target-date funds to the list — but not by much, particularly when mapping the route to retirement.

A TDF-style funding strategy allows for life events and roadblocks. At the same time, it’s a way advisers can switch to a more conservative route as a client ages.

Cerulli Associates has predicted that 88% of new 401(k) contributions will go into TDFs by the end of 2019, and it’s easy to see why they are popular. “Financial advisers and target-date funds have the same end-goal,” says Jeff Holt, associate director, manager research, at Morningstar, “which is to help investors have adequate money for retirement.”


There are two approaches advisers can take when using TDFs in client portfolios.

“Some funds have a glide path to the date of retirement, gradually reducing exposure to stocks until the specified year of retirement and then leveling off,” says Christopher Parr, CEO of Parr Financial Solutions in Columbia, Maryland.

Alternatively, a TDF on a glide path through the targeted year typically has a higher allocation to stocks at that date, but decreases equities afterward.

So-called “through” target-date funds “generally see longevity risk as a major concern,” so they hold on to a higher equity exposure for more years and aim for better returns after retirement says Jeff Holt, associate director, manager research, at Morningstar. In contrast, aptly-named “to” TDFs are more focused on sequence-of-returns risk, reducing exposure to a market meltdown close to retirement and when portfolio drawdown begins.

Morningstar lists 34 TDF series as going through retirement, while 24 go to retirement; the 2015 to TDFs, past their target date, average less than 30% of assets in equities, while the 2015 through TDFs keep more than 45% in stocks.


Many advisers use TDF-style approaches to create a glide path for their clients’ retirement. But how they select those strategies and apply them can vary greatly. Some planners, such as Meg Green, fall into the “to” category.

“When clients are in their accumulation years, our portfolios tilt towards a 60/40 global allocation,” says Green, founder of Meg Green & Associates, a wealth management firm in Miami. “When a client reaches retirement, we skew towards a 50/50 global allocation.” That is, a retiree’s total portfolio could be about 50% invested in assets considered to be equities or near-equities, while 50% could be in assets akin to fixed income.

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Once clients reach retirement, “we don't reduce equities solely based on age,” Green says. “That depends on a client's risk tolerance … if they can take some extra possible volatility. We try to encourage clients to not go far from these allocations, unless there are specific reasons.”


Other advisers come out on the “through” side.

“We don’t change the asset allocation as clients grow older unless they change their answers significantly in the (annual) risk tolerance questionnaire,” says Cindy Conger, CEO at Conger Wealth Management in Little Rock, Arkansas. “We generally find that they may get slightly more conservative.”

“We don’t change the asset allocation as clients grow older unless they change their answers significantly in the (annual) risk tolerance questionnaire,” says Cindy Conger, CEO at Conger Wealth Management.

Let’s say Jane Smith has been a Conger Wealth client from ages 40 to 60. Over time, Jane’s answers about risk tolerance have shown a bit less interest in growth potential and a bit more desire for income and downside protection. Thus, Jane's age-60 portfolio probably has more in fixed income and less on the equity side versus her age-40 portfolio.

Jane will fill out a similar questionnaire every five years starting at age 65. By the time she is 80, barring something unforeseen, Jane's portfolio might lean more toward fixed income.

Is this a typical client scenario? “Yes, if Jane were to express changes in her risk tolerance in that way,” says Abigail Hollar, planner and vice president of operations at Conger Wealth. Consequently, her firm's approach to retirement asset allocation is analogous to a "through" rather than a "to" TDF.

Karen Altfest, principal adviser and executive vice president at Altfest Personal Wealth Management in New York, has a similar approach. “We may reduce clients’ equity holdings as they age,” she says. “Some people become anxious about getting older and having enough money for the rest of their lives. In real life, we’ve seen a small shift in asset allocation at older ages.”


Nevertheless, real life might throw a curveball to advisers who see themselves on the “through” side. “My preference is to keep reducing equity allocations as retirees grow older,” Parr says. He tells of a client who is in his 90s with a moderate-risk portfolio.

“We may reduce clients’ equity holdings as they age,” says Altfest Personal Wealth Management's Karen Altfest.

“He’s comfortable,” Parr says, “so he’s not changing his allocation. I have other clients in similar situations who say they’re ‘OK for now,’ with no need to change their asset allocation.”

Thus, the portfolio brought to retirement may be fine all the way through. Or, as Parr observes, some clients are reluctant to adopt a more conservative stance because “nobody wants to face up to getting older.”

Yet planning for asset allocation in retirement probably will not be as simple as choosing between the “to” or “through” glide paths.


Many retirees see their asset mix ebb and flow. “Our clients usually don’t have linear changes in their risk tolerance,” Hollar of Conger Wealth says. “That can change with how they perceive their financial situation and other inputs.”

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Hollar tells of a couple who was nervous about losing money after the 2008 stock market slide. “Emotionally, they needed low-volatility investments then,” she says, “so we put them into a much lower-risk allocation than we would ordinarily recommend.”

Two years later enjoying retirement, and “we were able to take reasonable risk in their portfolio, increasing the equity exposure to possibly capture growth for their advanced age,“ Hollar says.

Altfest says that age “is certainly an important factor,” but a client’s comfort level, acceptance of market risk and need for withdrawals also play a role.


“The companies offering target-date funds frequently publish papers, which can be worthwhile,” says Jeff Holt, associate director, manager research, at Morningstar.

There may be practical concerns about any TDF-style glide path today, with fixed-income holdings increasing as clients grow older.

“In a perfect world, discussing asset allocation in retirement would be an easy conversation,” says Ian Weinberg, CFP, CEO of Family Wealth & Pension Management in Woodbury, New York. “Now, it’s not so easy. The yield on the 10-year Treasury is around 1.5%, compared to the historical average of 5% to 6%.”

Today’s low yields could rise, devaluing bonds. “If a new client came in today,” Weinberg says, “retiring with all cash, would I suggest buying a lot of fixed income? Probably not. We’re looking for other ways to diversify, including dividend-paying stocks, MLPs, market neutral funds, structured notes, and immediate annuities for clients over 70.”

If a pure “to” or “through” glide path might not work for some clients, what can advisers learn from TDFs?

“The companies offering target-date funds frequently publish papers, which can be worthwhile,” Holt says. “These funds have strategies that are not just stocks or bonds — they go to the next layer, so advisers can see the (market) trends.”

Moreover, TDF families explain their strategies — such as whether they provide “to” or “through” funds. “The managers clearly present their stories upfront,” Holt says.

Advisers who take this road, communicating their approach to long-term asset allocation, might discover that clients like the idea of being on a carefully chosen path to a comfortable retirement. An attainable certainty.

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