The market rout of 2008 was rough on everyone, but unsuspecting participants in target-date funds were particularly shaken.

These funds, designed to protect investors by decreasing their exposure to stocks as they get closer to retirement — a process commonly called the fund’s “glide path” — performed much worse than expected as a group during the global financial crisis.

Those unitholders close to retirement saw as much as a quarter of their savings melt away, despite being held in funds these clients mistakenly thought were “safe.”

Realizing that this situation can and may happen again, these results have sparked a debate within some investment circles over the strategy of target-date funds once they reach their “landing point.”

Some critics have argued that target-date portfolios should drastically reduce their equities position as unitholders reach their designated retirement year. Allocations would then drop to a dramatically lower level of equities exposure, suddenly creating a much more conservative and lower-risk portfolio.

Other experts assert that this perceived move to safety could actually end up putting unitholders at more risk. Instead, these experts espouse a glide path that continues to evolve beyond retirement, gradually decreasing equities exposure only much later in life.

In a recent Vanguard Center for Retirement Research paper, Target-date Fund Investing: Shattering the Myths, authors John Ameriks and Steve Utkus place themselves firmly in the latter camp.


Despite recent 20/20 hindsight, the paper’s authors maintain that target-date funds should be designed with a longer-term horizon that considers investor behaviour well into retirement, particularly given the fact that withdrawals are generally intermittent and infrequent until age 70.

Citing a National Bureau of Econ-omic Research paper, The Drawdown of Personal Retirement Assets, Ameriks and Utkus note that many U.S. investors seem to hold off tapping into their assets in the early retirement years.

On average, U.S. households with an age range of 60 to 69 and with personal retirement asset accounts withdraw only about 2% of their account balances each year, NBER’s data suggest. Even at much older ages — after the required minimum distribution age of 71, for instance — the percentage of balances withdrawn remains at about 5%.

Although Canadian rules regarding registered retirement income funds might result in larger withdrawal percentages over time, the pattern of withdrawals seems to be similar.

There are additional reasons, the authors note, why clients may want to choose target-date funds that offer meaningful equities allocation for investors later in life.

For one, with the average life expectancy now reaching the early 80s, the majority of retirees need their assets to last at least 15 years, and a significant minority will require asset growth for up to 30 years.

Rapidly rising cost-of-living and health-care costs also make a strong case for retiree portfolios with growth potential. For example, during a 20-year time frame with moderate inflation of 3%, prices could double. Investors who become too conservative too soon could see their standard of living decline quite dramatically by their 80th birthday.

Finally, it’s important to remember that retirees still have the ability to alter their retirement plans — although far less so than younger investors — if absolutely necessary. IE