Go and look at the largest holding in your retirement account. Odds are there is a four-digit year sitting in the middle of the name. Mine says 2030.
That year is an instruction rather than a label. The fund sells stocks and buys bonds as the year approaches, on a published schedule. It runs on that schedule whether anybody in the household is watching or not.
The industry calls it a glide path. It is the most literal version of this letter’s whole argument. Arithmetic, with a birthday attached.
These funds are the most common investment in American workplace plans. And Morningstar keeps reporting the same thing. The glide paths have converged.
So millions of people born the same year now hold very nearly the same portfolio. Same rule, same result. It does not ask which of them has a pension, or which is still working at sixty-eight.
One detail from the fine print surprised me. The big families run what they call a through path. Selling stocks and buying bonds keeps going after the target year. For another ten to thirty years.
What 5.2% hands you
Income on money that has not been committed yet. A dollar going in this month buys a stream nobody in this cohort could get in 2015, and the government is contracted to pay it.
What it charged you
Price on the bonds already in the fund. Fidelity states the rule in its own paperwork: as rates rise, bond prices usually fall, and the effect is more pronounced for longer-term securities.
Both columns are true at once, in the same account. The glide path put you in the second one on schedule.
Which is why today is worth a note. The Treasury begins buying its own long-dated paper this morning, and the ten-year sits near 4.8%. That is the market our funds were walked into by birth year.
A schedule inside a schedule, which is the part I keep coming back to.
Somebody gets paid for running that schedule. It is the dullest business in this letter.
The catch matters, so I want to be fair about it. Vanguard’s own research shows these funds pulled a lot of people out of wildly unsuitable portfolios and into age-appropriate ones. The default beat what most of us were doing by ourselves.
The complaint is narrower. One converged schedule cannot know which of us has a pension.
The arithmetic
Yields are approximate market levels this week, thirty-year Treasury around 5.2% and ten-year around 4.8%, and the Treasury’s programme of buying long-dated paper begins today. Target-date funds being the most prevalent investment type in defined-contribution plans, and the convergence of glide paths across fund families, are Morningstar findings. The through path continuing to shift allocations for ten to thirty years past the target year reflects the published designs of Fidelity Freedom, Vanguard Target Retirement and T. Rowe Price. The statement that bond prices usually fall as rates rise, with the effect more pronounced for longer-term securities, is quoted from Fidelity’s own fund documentation. The finding that these funds moved participants into more age-appropriate allocations and reduced extreme portfolios is Vanguard’s own research. Nothing here is a recommendation to buy, sell or hold anything. The read on who profits is Boomers Trade’s own.
Watch the through path rather than the yield. What it does to your mix after the year on the label keeps running long after you stop contributing. My fund says 2030. Somebody already chose what 2045 looks like for me, before I had read a word about it.
Andrew
Boomers Trade is written by someone getting older right alongside you, and watching who profits from it.
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