Massachusetts 457 SMART Plan: Why Target Date Funds Misjudge Your Pension
By Tim Hayes, Financial Advisor for the Public and Not-for-Profit Sector
The SMARTPath funds do not know you have a pension. They do not know your Social Security was just restored. They only know your birth year.
Understanding the "Fund-of-Funds" Structure
When it comes to your retirement savings, diversification is a key goal. Many participants believe that holding a dozen different funds provides better protection, but in the Massachusetts 457 SMART Plan, you might be using more funds than necessary.
The SMART Plan’s core options are already highly diversified. When you select a single “custom” fund, you are often investing in a basket of institutional-grade funds, with the plan having selected several firms to manage the underlying assets.
- Large Company Value Stock Fund: This is not just one fund; it is a blend of three underlying funds (including managers such as Dodge & Cox) that invest in large US companies.
- Large Company Growth Stock Fund: This comprises four underlying funds (including managers such as Fidelity) that also invest in large US companies.
- Large Company Blend Stock Fund: This fund provides exposure to the large-cap market through Vanguard, T. Rowe Price, Northern Trust, and Fidelity, offering both growth and value.
- Small Company Stock Fund: This is where you find Dimensional Fund Advisors (DFA), a unique company that uses a distinctive process to capture market returns, as well as three other fund companies.
- Diversified Bond Fund: This core option draws on the expertise of Loomis Sayles and two other bond funds.
Professional Management & Indexing
I recommend focusing your portfolio on managers with proven institutional track records, including Dodge & Cox, Fidelity, Dimensional (DFA), and Loomis Sayles. However, active management isn’t always the best fit for every asset class:
- International Stocks: Where I have less confidence in the active management choices, I recommend using the International Stock Index Fund instead. This provides broad market exposure without the risks associated with active manager selection in this category.
- A Note on Arrowstreet Capital: You may notice Arrowstreet as a manager in the active international sleeve. They use a quantitative (quant) approach—less akin to a “traditional mutual fund” style of investing. If you are uncomfortable with a more quant or hedge fund-type approach, I recommend using the index fund instead.
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Rounding Out the SMART Plan Options
To round out a custom portfolio, the plan offers several specific index and fixed-income building blocks:
- Index Options: For those who prefer passive management, the plan offers a Large-Cap Stock Index Fund (S&P 500) and a Bond Index Fund.
- TIPS Fund: Provides inflation protection by investing in Treasury Inflation-Protected Bonds.
- High-Yield Bond Fund: Seeks higher income through lower-rated corporate debt, managed by Nomura and Eaton Vance.
- SMART Capital Preservation Fund (Fixed Account): A conservative option that protects your principal while providing a steady rate of return.
SMARTPath Target Date Funds
For participants who prefer an “all-in-one” solution, the plan offers SMARTPath Retirement Funds. These funds are designed to be hands-off investments that automatically adjust their risk levels, becoming more conservative as you approach your target retirement year.
The "Pension Gap": Why Target Date Funds May Be Too Conservative
Most Target Date Funds (like SMARTPath) are designed for the “average” American worker who relies solely on Social Security and their savings. Because that person has no other safety net, the fund must become extremely conservative (heavy in bonds) as they approach retirement to protect their only source of cash.
However, as a Massachusetts public employee, your situation is different:
- Your Pension is a “Virtual Bond”
Your monthly pension is like a massive bond holding. If you are receiving $4,000 a month for life, that is equivalent to roughly $1 million invested in a fixed-income account.
- The Conflict: If you have a “virtual bond” (your pension) and your SMARTPath fund also shifts 60–70% of your savings into bonds, you are likely overallocated to conservative investments. This can leave your portfolio unable to keep up with inflation over a 20- or 30-year retirement.
- The WEP Repeal Factor (New for 2025-2026)
With the repeal of the Windfall Elimination Provision (WEP) and the Government Pension Offset, many of you will see a significant increase in your Social Security benefits.
- Increased Safety Net: This repeal further raises your “guaranteed income floor.”
- The Opportunity: With more guaranteed income from your pension and full Social Security, you may have the risk capacity to keep your 457(b) more aggressively invested in equities (Dodge & Cox, Fidelity, DFA) to seek long-term growth and legacy wealth.
- The “One-Size-Fits-All” Problem
The SMARTPath funds do not know you have a pension. They do not know your Social Security was just restored. They only know your birth year. They will continue to “de-risk” your 457(b) into low-yielding bonds exactly when you might need growth the most to combat rising healthcare costs.
The Role of an Independent Advisor
It is important to understand the role of the “Retirement Plan Advisors” provided by the plan. These individuals are salaried employees of the plan administrator, Empower. While they are available to answer administrative questions, these interactions are often used to cross-sell Empower’s managed account services, which carry additional asset-based fees and bonuses for the advisor.
How I Can Help You: I am an independent financial advisor not affiliated with the SMART Plan. I provide objective oversight of your strategy for a transparent hourly fee.
- Custom Portfolio Design: We can design a portfolio using the specific managers we’ve discussed—tailored to your personal risk tolerance.
- Rollover Strategy: If you have retirement accounts from previous employers (401k, 403b, or IRAs), I can help you evaluate and execute rollovers into your SMART Plan.
- Social Security Planning: Estimating your new benefits after the Fairness Act and allocating your 457 plan to reflect this new world.
Why the 457 Plan is Your Best Retirement Tool
- Institutional Pricing: The plan’s scale provides fees (like the 0.01% S&P 500 Index) that are nearly impossible to find in a private IRA.
- No Age 59½ Penalty: You can access your funds immediately upon leaving your job, regardless of your age. This is the “secret weapon” for early retirees.
- Systematic Withdrawals: We can set up a “retirement paycheck” from your 457(b) that bridges the gap until you collect your pension and Social Security.
Tim's Independent 457 SMART Plan Strategy Package — $300
Whether you are just getting started with your 457(b) or looking to optimize an existing strategy, this package helps position your SMART Plan to work for you as a Massachusetts public employee.
What is included:
- Set up or review your 457(b) account and fund selections
- Design a custom portfolio using institutional managers (Dodge & Cox, Fidelity, DFA, Loomis Sayles)
- Factor in your pension and restored Social Security benefits after the WEP/GPO repeal
- Build a strategy tailored to your retirement timeline and long-term growth goals
How a Massachusetts Public Employee Specialist Advisor Adds Value
As an independent advisor charging an hourly fee, I don’t just look at your 457(b) in a vacuum. I look at your entire financial picture:
- Pension Integration: We calculate the value of your pension to determine the “true” asset allocation of your total wealth.
- WEP/GPO Strategy: We factor in your restored Social Security benefits to see how much risk you can actually afford to take.
- Custom Glide Path: Instead of the generic AllianceBernstein recipe, we can build a custom strategy using the Core Funds that accounts for your pension, ensuring your 457(b) works as a growth engine rather than just another bond bucket.
Schedule a Consultation with Tim Hayes
Fiduciary financial advisor with 35+ years helping Massachusetts public employees and educators with retirement planning. Fee-based, hourly, or commission — whatever fits your situation.
"My goal is to ensure your retirement plan is built on your best interests, not a product sale."
Schedule a consultation or call 508-277-5847.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.