Why Traditional 401(k) Plans Are Failing and How Target Rate Funds Offer a Solution

Jim Kaffen

Wed Oct 30 2024

Target Rate Funds, powered by a unique optimizer, address the gaps in traditional 401(k) plans by providing personalized income projections and asset allocation strategies. These funds use participant-specific data to set realistic return targets and create flexible glide paths, ensuring participants only pay for active management when it adds value. Target Rate Funds offer a comprehensive solution to the vulnerabilities of traditional plans, empowering participants to retire confidently.

The SECURE Act’s mandate to include lifetime income projections on 401(k) statements was meant to provide greater clarity to participants. However, these projections often rely on generalized assumptions that don’t align with individual needs, creating a false sense of security. This risk is further underscored by recent lawsuits against major companies, where participants faced financial shortfalls due to high fees, limited investment options, and underperforming proprietary funds. These cases highlight the vulnerabilities of traditional plans that fail to address the unique income needs of each participant

How Target Rate Funds, Powered by a Unique Optimizer, Address These Gaps

Target Rate Funds offer a participant-focused alternative, driven by proprietary optimization software developed by Frank Sortino. This optimizer, created with contributions from Nobel laureates William Sharpe and Daniel Kahneman, Bradley Efron (Presidential Medal of Science recipient), and other distinguished academics, uniquely evaluates whether active management adds measurable value beyond passive strategies. The optimizer’s goal is clear: to find the best combination of passive and active managers that adheres to the participant’s asset allocation strategy, ensuring participants only pay for active management when it delivers real benefits. This level of fiduciary support goes beyond what is typically offered in standard 401(k) structures.

Introducing the Target Rate Funds Calculator: Precision Through Personalization

Target Rate Funds feature a sophisticated calculator that uses participant-specific data—such as age, income, assets, retirement goals, contribution rate, and income replacement needs—to set a realistic return target. Once the required return is identified, the calculator links this target to an asset allocation strategy developed by the optimizer, which is agnostic in its analysis of investments. Rather than being influenced by fund type or brand, the optimizer objectively selects the ideal mix of passive and active managers to populate the asset allocation, aligning with the advisor’s preferred asset weightings across various classes. This process provides participants with a transparent, efficient portfolio designed to achieve their retirement goals.

Target Rate Funds Leverage Key Participant Data for Precision

  1. Dynamic Return Targets Based on Personalized Inputs: Target Rate Funds use individualized demographic data to set a return target that adjusts as markets and personal situations change, helping participants stay aligned with their income goals without relying on static projections.
  2. Income Replacement Focus with Personalized Projections: Unlike traditional plans, which often leave participants unsure about necessary savings, Target Rate Funds allow participants to set their desired income replacement percentage. This approach focuses on achieving precise, participant-defined income needs in retirement, reducing the risk of running out of savings
  3. Flexible, Data-Driven Glide Paths: Standard 401(k) plans may use fixed allocations that don’t align with individual needs. Target Rate Funds create flexible glide paths based on demographic data, such as age and life expectancy, allowing for a personalized approach to risk that evolves with each participant’s financial journey
  4. Enhanced Transparency and Fiduciary Protection: The optimizer’s objective approach, combined with the calculator’s precision, ensures that participants only pay for active management when it provides tangible value. This transparency addresses many issues raised in recent lawsuits, empowering participants to make informed decisions within a retirement plan that’s both transparent and adaptable

The Case for Target Rate Funds as the New Standard

As recent lawsuits expose the weaknesses of traditional 401(k) structures, Target Rate Funds offer a comprehensive solution. By combining an agnostic optimizer with a data-driven calculator, these funds provide participants with a realistic, adaptable roadmap that keeps them on track toward their unique income goals. This forward-thinking strategy empowers participants to retire confidently, supported by a plan that prioritizes their evolving financial needs with an approach as flexible as life itself.