However, the 5m self-employed workers in the UK (up from 3.2m in 2000) have largely been ignored. This problem is compounded by the fact that we have a burgeoning gig economy, where almost 4.5m people regularly find work through online platforms in England and Wales. I should stress that there is a huge overlap as 48 per cent of gig workers also have a full-time job.
TDF structure
TDFs’ core principle is often called a glide path to retirement. Quite simply, it is based on an investment manager ensuring an appropriate asset allocation given someone’s time to retirement. Within this, it is the need to ensure the balance changes over time.
Having a professionally managed approach based on personalised parameters is plainly much better than the individual investor trying to do this themselves, unless we are talking about a very high-net-worth investor with adviser support.
Personal yet part of a cohort
Ignoring high-net-worth individuals, who often have significantly different risk budgets and profiles, most of us need support with our retirement investment planning.
Such support on an individual level would be prohibitively expensive, but when a cohort of people with the same objective, such as age 45 now and wanting to retire at age 67, are combined, then the problem becomes easier to manage. This is the basis on which almost all TDFs operate.
A personalised, yet collective approach also has other benefits, including:
- Providing an uplift for people with inadequate savings.
Many people will be sufficiently far away from retirement age that they should be investing in assets that have a higher risk and reward ratio. Unfortunately, if you have inadequate savings the automatic approach is to invest in less risky investments, accepting the fact that it will most likely produce a likely poorer return. However, by pooling assets such an approach can be ameliorated over multiple participants, hence on aggregate a higher return is produced. The creation of a larger pension pot also helps reduce some of the longevity risks that an individual might face.
The recent 2020 study in the US by Mitchell and Utkus of 401k-focussed TDFs found that people using low-cost TDFs as the default fund option improved their asset allocation in several important ways. They increased their allocation to equities and bonds and decreased the allocation to company stock and cash.
TDFs a popular investment among the young
Of particular importance if we are looking to close the retirement savings gap and help support the self-employed, gig workers and auto-enrolment workers is offering products that they understand and are easy to manage.
