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Beyond Target Date Funds: How Tailored 401k Plan Strategies Keep Near-Retirees On The Right Path
by Christopher Carosa, March 24, 2025
Here’s a riddle wrapped in a market mystery: what’s scarier than a target date fund for a near-retiree? The answer isn’t the fund itself—it’s the one-size-fits-all glide path that might leave them high and dry when the market tanks just as they’re ready to cash out.
As retirement looms, 401k participants face a tightrope walk. They must balance risk against the need for enough cash to enjoy their golden years. Target date funds have long been the go-to for their set-it-and-forget-it charm, but for those 2-3 years shy of retirement, they might not cut it.
How should plan sponsors and ERISA fiduciaries use tailored strategies to craft 401k plans that keep near-retirees steady? What point triggers swapping generic glide paths for personalized precision?
Let’s first take a step back. In the old days, too many 401k participants allowed fear to put them in “safe” but underperforming assets. Target date funds blossomed out of the 2006 Pension Protection Act as everyone’s (or so it seemed like everyone’s) favorite QDIA. They promised simplicity: pick a retirement year, and they’ll shift from stocks to bonds as that date nears. A 2030 fund, for example, starts heavy on equities in your youth, easing into bonds by the time you’re eyeing the exit sign. It’s a neat trick, but it’s not foolproof, especially for those knocking on retirement’s door.
The numbers tell part of the story. According to Vanguard’s “How America Saves 2023,” 60% of participants within five years of retirement lean on target date funds, making them a default darling. But here’s the rub: their glide paths, which dial down equities to 20-30% at the target date, (per Morningstar’s “Target Date Funds: A Primer”), still leave a chunk exposed to market swings—hardly ideal when you’re about to start withdrawals.
The “Sequence of Returns” risk looms large here. A market dip right before or after retirement can gut a portfolio if you’re forced to sell low. Target date funds, even at their tamest, carry this baggage, and near-retirees need more than a cookie-cutter fix. That’s a wake-up call. Generic doesn’t always equal safe.
“Target date funds assume that every person of the same age has the same cash flow needs,” says Mary Clements Evans of Evans Wealth Strategies in Emmaus, Pennsylvania. “Your asset allocation should be designed using your cash flow needs by year.”
Variability adds another wrinkle. Not all target date funds are created equal, and history proves it. The 2008 meltdown exposed this flaw, with some funds taking a beating while others held steadier.
“When the market meltdown hit in 2008 the world and government wonks (DOL) woke up and were shocked to discover that not all TD funds were the same,” says Terrence Morgan, president of Ok401k in Oklahoma City, Oklahoma. “Some 2010 glidepaths were ridiculously overly aggressive and got creamed, whereas some in 2010 did not lose that much. Enter the glidepath debate which unfortunately seemed to have disappeared. We need to bring back the To vs. Thru debate but fund companies want it to conveniently disappear. Making 401k committees address glide paths and document how and why they select their TD funds will fix everything.”
Plan sponsors can’t just toss a fund on the menu and call it a day—due diligence matters.
So, how do you pivot from this autopilot approach? Tailored plan design is the answer, and it starts with giving near-retirees options that fit their lives, not just their birth years. Managed accounts are one piece of the puzzle, offering a bespoke touch that adjusts to individual quirks—think return requirements, cash needs, and retirement dreams.
This isn’t just tweaking a dial—it’s a full-on recalibration, letting near-retirees sidestep the rigid tracks of target date funds. Low-risk options are another arrow in the quiver. Money market funds, stable value funds, or short-term bonds can act as a safety net, letting participants stash cash for those first retirement years without sweating market dips.
“Plan sponsors can help by offering education and tools that encourage participants to gradually shift a portion of their assets into a designated cash or capital preservation option as retirement approaches,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “They can also design plan features that automate the creation of a ‘retirement runway,’ such as allocations that participants can toggle to stable value or money market funds starting a few years before retirement. Clear communication about the purpose of this buffer—providing peace of mind and protection from market dips—can make the strategy more relatable and actionable. Ultimately, it’s about making the safer choice, the easier choice.”
This is a playbook that’s a lifeline for near-retirees who can’t afford to ride out a storm. Education ties it all together. Near-retirees aren’t just numbers—they’re people with questions, fears, and plans. A solid educational push can turn confusion into confidence, arming them with the know-how to navigate this tricky phase.
“Provide all participants with a one-page forecast report two years out from retirement of how much their portfolio will go down or up in various volatile past markets,” says Morgan. “Much like the insurance annuity life income reports they get now.”
Picture it: a clear snapshot of what’s at stake, handed to participants before the clock runs out.
The trend’s already picking up steam. A 2023 Cerulli Associates report, “US Retirement Markets Report 2023,” pegs managed account adoption in 401k plans at 35% in 2022, up from 25% in 2019. That’s no fluke. It’s a sign plan sponsors are waking up to the need for flexibility, especially for those on the cusp of retirement.
In addition to structural changes in plan design, education is paramount. Many participants are not fully aware of the limitations of their current investment options or the potential benefits of a tailored cash reserve strategy.
“Participant education is important to help 401k enrollees transition from saving for retirement to actually being in retirement,” says Yehuda Tropper, CEO of Beca Life Settlements in Toms River, New Jersey. “In-person or phone consultations are, of course, helpful, but at-home resources like webinars and online retirement calculators let people absorb information at their own pace, think about it, and come back with more questions.”
By providing clear, targeted education, plan sponsors can empower participants to make informed decisions about their asset allocations. This educational outreach should include interactive tools, webinars, and personalized retirement readiness reports that detail the potential benefits of shifting a portion of their portfolio into cash or stable value funds. Such resources not only enhance financial literacy but also build the confidence needed to navigate the transition from accumulation to distribution.
While many plan sponsors have relied on target date funds as a default solution, there is growing recognition that more flexible investment options are necessary.
Lawrence (Larry) Starr, executive VP at Cornerstone Retirement in West Springfield, Massachusetts, says, “Just provide the in-service distribution option so participants can take some/all of their money and do whatever THEY want to do with it.”
Offering additional flexibility—such as managed account solutions or the option to create personalized target date models—allows fiduciaries to tailor investment strategies to the individual needs of near-retirees. Modernizing retirement plans to include these options can lead to better outcomes by ensuring that each participant’s portfolio is aligned with their unique cash flow needs, risk tolerance, and retirement timeline.
Data from the Investment Company Institute supports this move toward flexibility, noting that participants who have access to a broader range of investment options tend to be more engaged and better prepared for retirement. The integration of managed account solutions, which adjust allocations dynamically based on market conditions and individual circumstances, can further optimize the balance between growth and preservation.
“Plan sponsors should revisit their retirement plans to make sure the plan is drafted properly and the suite of investments and investment options matches what is best for their employees,” says Bob Welch, senior vice president at Wealth Enhancement Group in Oakland, California. “Older plans are typically insurance-based, expensive to administer, and offer subpar investment options. Modernizing a plan can mean better options, less fees, and a more transparent offering for plan participants. One of these solutions would be allowing for managed account solutions, or allowing an advisor to professionally manage the plan assets. An advisor will keep you on track and make sure investment decisions are being made that best enhance the outcome for the plan participant. Ongoing support is critical and will ensure plan participant success in saving for retirement.”
The need for a hyper-customized approach is clear. Fiduciaries must move beyond the limitations of traditional target date funds and develop strategies that incorporate both the growth potential of the market and the stability provided by a dedicated cash reserve. This is not merely a matter of academic debate; it is a practical imperative that can have a profound impact on the financial security of near-retirees.
To achieve this, plan sponsors should: Reassess Default Investment Options: Review the current suite of available investments and consider replacing or supplementing generic target date funds with options that allow for a tailored cash reserve.
Invest in Participant Education: Develop and disseminate clear, comprehensive educational materials that explain the importance of balancing growth with liquidity.
Enhance Plan Flexibility: Offer additional investment options, such as managed accounts or personalized target date models, to enable participants to fine-tune their asset allocations as retirement approaches.
As we navigate the final years before retirement, the stakes have never been higher. The conventional wisdom embedded in target date funds, with their generic glide paths and lack of a dedicated cash reserve, is increasingly at odds with the nuanced needs of today’s workforce. By embracing a tailored approach that incorporates a cash buffer, robust educational initiatives, and flexible investment options, fiduciaries and plan sponsors can better protect participants against the risks of market volatility and sequence-of-returns risk.
For ERISA fiduciaries, the challenge is clear: move beyond the default, and design a 401k plan that truly serves the diverse needs of its participants. In doing so, you not only safeguard retirement incomes but also reinforce the trust placed in you by those relying on your expertise.
In a world where no two retirement journeys are the same, a personalized strategy is not just beneficial—it’s essential. As we look to the future, let’s commit to strategies that put participants on the right path, ensuring that every near-retiree is equipped to face the uncertainties of the market with confidence and resilience.
Target date funds might be the easy button, but they’re not the golden ticket for everyone, especially near-retirees staring down sequence risk. By weaving in managed accounts, low-risk havens, and a hefty dose of education, plan sponsors and ERISA fiduciaries can craft a 401k that’s less about autopilot and more about precision. This isn’t just about dodging market curveballs—it’s about landing near-retirees safely on the other side, cash in hand and a sly grin on their faces.