Coming Soon: Revenge of the Baby Boomers

Coming Soon: Revenge of the Baby Boomers

·?????? Baby boomers, who make up a significant portion of the US population and control a large portion of the nation's wealth, want their retirement savings protected.

·?????? Many baby boomers are currently invested in target date funds (TDFs) that are not safe and do not provide the protection they desire.

·?????? Baby boomers may take legal action and demand restitution from their employers if they discover they are not adequately protected in their TDFs.

·?????? For baby boomers, the “long run” is really short. They might never recover from the next stock market crash.

At 76 million strong and worth $70 trillion, baby boomers are a formidable force to reckon with. According to this Financial Advisor article:

The baby boomers don’t just dominate the financial industry. If we continue to ignore their very clear preferences for financing retirement—they will be the facilitators of whatever and whomever replaces us. They have the power….

76 million baby boomers, together with their children and aging parents represent more than a third of the U.S. population. They own half the nation’s wealth and do 70% of its consumer spending.

Do not make baby boomers angry.

The financial journey of boomers has been good so far, but that is likely to change at the worst possible time – in the retirement Risk Zone.? Losses sustained in the Risk Zone spanning the 5 years before and after retirement can irrevocably spoil? the remainder of life.

Most boomers will spend this decade in the Risk Zone. There are lots of reasons to believe that they will not make it through without a major stock market correction. Importantly, boomers in target date funds (TDFs) will not be protected from losses, although most think they are protected. They will be shocked.

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Baby boomers have spoken: they want protection

Surveys of 401(k) participants reveal that they want their lifetime savings to be protected at this critical time in their life, but the most popular 401(k) investment does not provide this protection. TDFs – with $3.5 trillion and growing – are not safe at their target date. They are 90% risky with 55% equities plus 35% risky long-term bonds, a mix that lost more than 30% in 2008.

Astonishingly, TDF participants do not know that they are exposed to high risk as they approach retirement. They should know, but they don’t because they trust their plan sponsor to protect them. Baby boomers will be angry when they find out that they are not protected. This will not bode well for TDF providers.

Boomers know they need protection, and they have asked for it, but they’re not getting it. They will get their revenge, and maybe even get some of their losses back in excessive risk lawsuits and demands for restitution from their employers.

Boomers will transform the TDF industry from “risk on” to “safe at the target date” by moving out of current TDFs into newer innovative approaches like personalized target date accounts that actually protect. They will close the barn door on risky TDFs.

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Most TDFs are risky, but a few are safe

Most TDFs are invested 85% in risky assets at their target, with 55% in equities plus 30% in risky long-term bonds. But there are a few TDFs – like the Federal Thrift Savings Plan (TSP) -- that are very safe at their target date. Safe is the TDF exception. Risky is the TDF rule.

In Theory And Evidence In 401(K) Default Investments I explain that most TDFs do not follow the academic theory that they say they follow. ?They are far riskier than theory at their target date. Consequently, most TDFs have failed to protect in market declines, as shown in the following picture.

In their short 15-year history, the safety of TDFs has been tested only twice, and they have failed both times. The next test may be the biggest.

The few TDFs that actually follow academic theory have defended, and will defend again, but they are not widely used. They're like the safe automobiles that transformed the auto industry of the 1960s.

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A lesson from the 1960s auto industry

We’ve seen what happens to companies that ignore consumer preference for safety. The Big 3 manufacturers of the 1960s auto industry suffered a 50% loss of market share because their muscle cars were unsafe, leading to serious injuries when they crashed.

The following table from this article summarizes the similarities between the 1960s auto industry and today’s TDF industry.

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The “indomitable Big 3” TDFs will not remain on top.

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Conclusion

Budha said, “Impermanence is eternal.” The world is always changing. The unwillingness to protect baby boomers in their TDFs will prove disastrous to baby boomers and to the companies that manage their TDFs. It’s a shame that pain? will be the catalyst for revitalization. Phoenix will rise from the ashes.

TDF providers will re-learn the lessons of the 1960s auto industry. Stay tuned. There will be crashes with serious injuries that bring down the colossal wrath of the baby boomers.

As I’ve warned before, if you’re near retirement and invested in a TDF, you should get out now and move to the safety of Treasury Bills and intermediate TIPS while you’re in the Risk Zone.

?Be safe rather than sorry because it matters for the rest of your life. We each journey through the Risk Zone only once. 76 million baby boomers are currently making this journey.