Investors should reduce their equity exposure as retirement approaches—that’s the conventional wisdom, and it’s the fundamental premise of the current 800-pound gorilla of workplace retirement investing: the target date fund (TDF). But conventional wisdom can be wrong—and a handful of well-respected researchers set out to prove it in recent papers questioning the current glide path approach.

A research paper co-authored by Rob Arnott, CEO of Research Affiliates, argues that target date funds take risk and return off the table too quickly for pre-retirees, and that they are forcing millions of retirement investors into negative-return fixed income vehicles, mainly Treasuries.

Another paper by Wade Pfau and Michael Kitces argues that the risk of portfolio failure in retirement is lower for investors who start retirement with a relatively low equity allocation and then increase stock allocations to 70 percent or 80 percent over time. (Pfau is a professor of retirement income at The American College; Kitces is director of research at Pinnacle Advisory Group.)

Both papers argue that retirees with low equity allocations miss out on big stock market rallies in the out years—a timely point considering last year’s eye-popping equity returns in 2013, and the likelihood that strong returns will persist this year.

There’s no consensus among TDF providers on the ideal equity/fixed income allocation; T. Rowe Price, for example, has long had a more aggressive stance than others in the industry, maintaining a 55 percent equity allocation at retirement date, compared with a 46.5 percent industry average as measured by the S&P Dow Jones target date indices. And Fidelity Investments increased equity allocations in its TDFs last fall by as much as 15 percentage points, bringing it closer to the stance of T. Rowe Price and Vanguard Group.

Arnott analyzed more than 140 years of historical returns, simulating hundreds of outcomes over time for three strategies: a glidepath that starts at 80/20 stocks to bonds; annual rebalancing to a 50/50 allocation; and an inverse glidepath that starts at 20/80 stocks to bonds, and moves to an 80/20 equity-centric allocation. He concludes that an investment of $1,000 over 40 years finishes an average of 11 percent better in a balanced fund than in a TDF; the inverse glidepath beats the TDF by 22 percent.

What’s the problem with target date funds?

“First, they are designed to take risk off the table as you get older and take return off the table in so doing, and they do it way too soon,” Arnott said. “You’re years away and already ramping down risk. In our research, you get richer as you get older, so when you finally have enough money to matter, you’re already moving into low-return assets. You wind up poorer and with no greater clarity on how much you’ll have in retirement.”

Another issue with target date funds is that assets are allocated on a valuation-indifferent basis, Arnott said.

“The return on a Treasury note is now lower than inflation, so they are certificates of expropriation. TDFs are forcing millions of people in their 50s to buy Treasury bonds with every rebalance, so they are locked up in assets with negative real return. Why would we want to do this?”

Arnott also believes target date funds limit investors’ opportunity by concentrating the portfolio in mainstream stocks and bonds.

“Investors are missing out on a whole sweep of alternative markets that may—and indeed today are—providing superior forward returns: emerging and international markets, high yield investments, real estate, and inflation-linked bonds,” he added. “Many of these categories, right now, are priced to give higher returns than stocks and bonds.”

Jerome A. Clark, a portfolio manager in the T. Rowe Price Asset Allocation Group with responsibility for the firm’s retirement funds, agrees that adequate equity exposure is important for retirees, but argues that it’s better to achieve this by focusing on the average equity allocation throughout retirement, rather than the slope. “We have to acknowledge that people have a decreasing appetite for risk in retirement. So, the way we enhance returns is to raise the bar. We think the slope is secondary; the most important thing is the average equity exposure throughout retirement.”

From a retirement security standpoint, this issue is broader than just equity/bond allocations, of course. It’s also critical to assess likely spending in retirement, draw-down rates and other income sources.

Many industry experts, including Arnott, acknowledge that TDFs mark an improvement for most retirement investors, who don’t rebalance when left to their own devices and make poor buy-sell decisions.

“They may be a blunt instrument, but they’re better than nothing,” says Don Ezra, director emeritus of global investment strategy for Russell Investments. “If the only thing we know is your age and your retirement timing, we can use that to construct a portfolio. But they more information you add to that, the more you can customize. How much are you earning? How much income will you have from Social Security? Every new piece of information allows you to do a better job setting your target date exposure.”

Arnott’s paper argues that TDFs can be improved by adding inflation-fighters such as inflation-protected Treasuries, real estate investment trusts, and more emerging market and international equities. Morningstar’s most recent TDF research report indicates many of the top-performing funds are already heading in that direction.

Are financial advisors moving clients out of stocks too soon? “That’s the tendency,” Arnott says. But Arnott’s research on glidepaths—along with the Pfau/Kitces paper—should provide good food for thought for advisors who may want to reconsider the issue.