For 401(k) investors nearing retirement, TDFs "failed summarily" in 2008, says Dave Haviland, managing partner and portfolio manager at Beaumont Capital Management.

"It's not all right for investors to lose a quarter of their savings as they are facing retirement," Haviland told BenefitsPRO.

Now, nearly a decade after the Federal Reserve stepped in to rescue Bear Stearns, the Dow Jones Industrial Average stands at roughly four times the value of its 2009 bottom.

But record equity markets are masking what Haviland thinks are systemic design flaws in TDFs.

"The first generation of funds is at a disadvantage—they all came up with the idea of a glide path," said Haviland.

As the TDF market has surpassed $1 trillion in value, accounting for about one fifth of all 401(k) assets, fund companies differentiate themselves with passive and active strategies, increasingly lower fees, and deviations in how equity risk is spread along glide paths.

But the core adherence to the glide path structure, which adjusts risk based on proximity to retirement, leaves funds looking very similar, thinks Haviland. "As far as we can tell, the biggest differentiation is marketing."

Redefining tactical

As a firm, Boston-based Beaumont has $4.3 billion in assets under management and advisement — $2.8 billion is in the firm's ETF strategies, the rest under its wealth management division.

Frustration with the TDF market's homogeneity motivated Beaumont's launch of the DynamicBelay series in 2014, a qualified default investment alternative TDF with five vintages spanning 2020 to 2060.

A career investment adviser, Haviland wanted to build a target-date option aligned with what he's found advising individuals through his career. "Advisers manage money over large periods of time, and you allocate investments to meet individuals' expectations."

And if you fail those expectations? "You're fired," he said.

The laws of behavioral economics, and credible market research, show investors of all ages to be more risk averse than the average TDF accounts for, says Haviland, citing data from Cerulli Associates showing 77 percent of investors prefer protection from significant losses, even it means sometimes underperforming market indices.

"Where is it written that you have to stay invested when markets go into failure?" said Haviland. "We wanted to create funds that had a better chance of taking advantage of good times, but are designed for significant protection in bear markets."

To achieve that, the DynamicBelay series marries a strategic and tactical approach to risk management.

Other TDF managers do as well. But it is the degree of tactical latitude—which allows managers discretion to deviate from strategic allocations along a glide path—that sets Beaumont apart.

In the DynamicBelay 2020 vintage, for instance, the strategic allocation is set at 50 percent in equities, and 50 percent in fixed income, a common ratio among TDFs.

But Haviland and his team have discretion to move as much as 85 percent of the fund to cash.

"We are aware of no other TDF family that has this amount of tactical capability," said Haviland.

Other TDF tactical approaches

When fund companies do allow tactical discretion, managers are limited in how much they can stray from core strategic strategies.

BlackRock's Lifepath 2020 fund sets a strategic equity allocation at 49 percent. Managers can tactically deviate up to 60 percent in equities, or as low as 40 percent, according to the fund's prospectus. By comparison, Beaumont's 2020 fund can move its strategic equity position of 50 percent to as low as 7 percent.

And JP Morgan's SmartRetirement 2020 TDF can deviate up to 10 percent from its strategic equity allocation of 40 percent.

Those allowances are too weak if markets were ever to suffer what they did in 2008, says Haviland, who underscored that the capacity to raise such significant cash does not necessarily mean the funds will.

Nor should the tactical component of the BCM's series be confused with an actively managed strategy that attempts to capitalize on 5 and 10 percent market pullbacks, he said.

"Those happen all of the time—2017 was an anomaly. Our process is not trying to anticipate market tops," he said.

Rather, the series tracks 10 exchange-traded-fund sectors, which are invested in equally when all are posting positive price trends in bull markets. As sectors trend negative, they are removed.

If seven of those sectors turn negative, the tactical equity allocation moves to 25 percent cash. If all 10 sectors go negative, the funds move to 100 percent of cash capacity. As sectors recover, cash is reinvested along a similar track.

"It's a disciplined, rules-based process that removes emotion, which is how investors can get hurt," explained Haviland.

Bear markets don't happen overnight

In 2013, the Labor Department issued guidance for plan fiduciaries in selecting target-date funds for 401(k) participants. Haviland said the tips sheet served as Beaumont's "bible" when it set out to launch its series.

In its general overview, Labor explained the glidepath principle of moving more savings to conservative investments as retirement nears. Bond and cash instruments "generally are less volatile and carry less investment risk than stocks," Labor wrote in its guidance.

But even with what Labor implies are safe investments, many TDFs are assuming too much risk, claims Haviland.

"The TDF market isn't addressing what DOL was after—giving investors a reasonable means of preserving assets as they get close to retirement," he said. "When people are investing in bonds at retirement, they are not trying to create alpha, they are trying to reduce beta."

Throughout the nearly decade-long bull market, more TDFs have invested in high-yield, emerging-market, and long-duration debt. Those are not safe bonds, says Haviland. "If equity markets fail, they correlate."

He charges that fund mangers have had to adopt riskier fixed income strategies in order to affect annual performance. "One of the things that really bothers us is the way most TDFs are managed in competition with one another."

Beaumont's series allows for tactical defensiveness in its fixed-income sleeve as well. If bonds go into a bear market, 47 percent of the 2020 fund's fixed income allocation can go to cash or short duration bonds.

"At some point in the future, we are going to have a significant correction in equities and bonds," says Haviland.

Beaumont's tactical approach relies on the fact that most bear markets take years to unfold. Timing bottoms is not that aim, insists Haviland.

"I don't think we need a bear market to prove our tactical strategy," he added. "But they will come, and when they do we think there is a better way to protect investors."