The problem with investing glidepaths

Investors should reduce their equity exposure as retirement approaches—that’s the conventional wisdom, and it’s the fundamental premise of the current 800-pound gorilla of workplace retirement investing: the target date fund (TDF). But conventional wisdom can be wrong—and a handful of well-respected researchers set out to prove it in recent papers questioning the current glide path approach.

A research paper co-authored by Rob Arnott, CEO of Research Affiliates, argues that target date funds take risk and return off the table too quickly for pre-retirees, and that they are forcing millions of retirement investors into negative-return fixed income vehicles, mainly Treasuries.

Another paper by Wade Pfau and Michael Kitces argues that the risk of portfolio failure in retirement is lower for investors who start retirement with a relatively low equity allocation and then increase stock allocations to 70 percent or 80 percent over time. (Pfau is a professor of retirement income at The American College; Kitces is director of research at Pinnacle Advisory Group.)

Both papers argue that retirees with low equity allocations miss out on big stock market rallies in the out years—a timely point considering last year’s eye-popping equity returns in 2013, and the likelihood that strong returns will persist this year.

My column today at WealthManagement.com examines the arguments (registration required).