No brown M&Ms
Some celebrity artists are notorious for having eccentric contract riders—such as, requests for backstage buckets of spicy, fried chicken wings (No thighs!) or a personal assistant on hand to dispose of chewing gum. While such riders are interesting to read about, many of them are trivial and lack any concrete purpose.
But that was not the case with Van Halen back in the mid-1970s through the mid-1980s. In their book, Decisive, authors Chip Heath and Dan Heath discuss how Van Halen skillfully used a rider as a safety-related tripwire. (A tripwire, in this context, is a technique for taking the mind out of autopilot mode and activating decisions; it is commonly used to prevent mistakes or to avoid overlooking an opportunity.) Van Halen’s tripwire was Article 126—better known as the M&M clause, which required a backstage bowl of M&Ms, yet with one catch—absolutely no brown ones. That’s right: No brown M&Ms—or else! If the concert promotional group failed to read the entire contract (including important electrical and structural requirements) and disregarded Article 126, then the band had the right to jump (Sorry, I couldn’t resist!) and cancel the entire concert with full compensation. Van Halen viewed this tripwire as an operational necessity—lives were at stake!
Do you have any tripwires for your workplace retirement account? What’s your quality-check process for determining whether or not your current investment allocation is a good fit for your own financial needs? What real-life circumstance would cause you to stop and say, “That’s a deal-breaker for me!”?
Perhaps, like many American workers, you currently invest in a target-date retirement fund (TDF) within your workplace retirement account. Target-date retirement funds are often featured as default options in retirement plans because they offer participants a one-stop, diversified approach to saving for—and funding—their living expenses in retirement. Investment managers who run TDFs typically think of participants’ needs in the context of retirement around age 65 and long lifespans after retirement.
Target-date retirement funds are quite practical and, as such, have grown in popularity among plan sponsors and participants in the last decade. The Plan Sponsor Council of America (PSCA) estimates three quarters of 403(b) plans and nearly 70 percent of 401(k) plans currently offer TDFs to their employees. Some industry experts project that nearly 70 percent of all retirement-plan dollars will be invested in TDFs in the next five years.
Yet, despite their usefulness, a recent survey conducted by the U.S. Securities and Exchange Commission suggests that TDFs are not fully understood by many who use them:
- Less than one-third of investors identified the correct meaning of the target-date retirement fund’s name.
- Only 36% understood that TDFs are not guaranteed sources of retirement income.
- More than half did not know TDF providers can vary in their mix of bond and stock investments for mutual funds built for a similar target retirement year (e.g., not all 2055 TDFs are alike).
So, the immediate takeaway from the SEC’s survey is this: If you invest in a target-date retirement fund within your employer’s plan, it’s important to know what you actually own (e.g., stocks, bonds and other investments held in the TDF) and how the TDF can help you.
Tripwires at work
This is where having some tripwires for your workplace retirement account can be helpful. Again, tripwires can help you establish some real-life conditions that clarify whether or not your current investment choice is still a good fit for your own needs. If you use a TDF in your retirement account, here are five tripwires to think about:
- The time frame tripwire: According to the U.S. Department of Labor, American workers have a tenure of about 4 ½ years with their current employers. That is a short time frame in which to save money. TDFs are intended to help folks prepare for retirement and are built for the long-run—far beyond 4 ½ years. Investment values can sharply move up or down in short time periods. So, think about your own circumstances: Are you really investing for the long run? How long do you plan to stay with your current employer? When you leave—whether it’s at age 35 or 65—will your current retirement plan allow you to keep your target-date retirement fund?
- The cash-flow tripwire: Let’s say you keep your target-date retirement fund until you retire. What’s next? How will your TDF support your income needs throughout retirement?
- The risk tripwire: Planning for retirement includes a wide variety of risks—from investment volatility and potential loss to running out of money too soon. Which risk is your highest priority—the one you’d most like to avoid in the long run? Are you comfortable with how your TDF manages this risk?
- The contributions tripwire: How much have you put aside for retirement? And how much will you and your employer contribute to your retirement account in the future? Since target-date retirement funds vary in how aggressively or conservatively they invest for the long run, the key here is to see how the TDF in your retirement account fits in your overall financial plan.
- The other-stuff tripwire: To what extent will you rely on other accounts and benefits (e.g., a defined benefit plan or an Employee Stock Ownership Plan) to supplement your income needs in retirement? How does your answer to this question influence your investment thought process now?
Help is available
These questions are merely conversation starters. Reach out to your plan sponsor or benefits specialist to learn more about the specific savings options, investment choices and planning resources available through your employer’s retirement plan. A local CFP® professional can also serve as an invaluable resource to you along the way.