Saving for retirement is always filled with uncertainty: Past investment performance doesn’t indicate future gains, and you may not have saved enough for an unexpected health issue or other family emergency. But for decades, investors and advisers alike have followed one guiding light: You can count on bonds or bond funds for safe, stable returns.
That all changed in 2022, when inflation soared and forced the Federal Reserve to raise interest rates. Those rate hikes hammered bond funds, reflecting bonds’ sensitivity to interest-rate changes: When interest rates rise, they erode the price of bonds and lift yields, which move in the opposite direction. The higher rates hit stock markets as well, because they ramped up borrowing costs for companies.
That left people who were feeling the pain of inflation looking for answers, says John Bovard, a certified financial planner in Cincinnati. Clients have been noticing that things are dramatically more expensive, he noted, adding: “One concern is if they’ll be able to enjoy [retirement] or have enough money saved to pay for any health-care expenses.”
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One type of investment that is a key part of saving for retirement for a large swath of Americans — including one-third of Bovard’s clients who are still working — is the target-date fund.
These funds operate on the guidance that savers should have less risk in their portfolio as they get closer to retirement, moving from higher-yielding but volatile stocks into more conservative, lower-yielding investments, such as bonds. The latter, in general, are thought to act as a buffer against losses, keeping the account balance stable at the same time someone takes money out during retirement.
Here’s what you need to know about target-date funds, and what recent history has taught us.
End of carouselWhat are target-date funds?
Target-date funds fall under the larger category of mutual funds or exchange-traded funds (ETFs) that are regulated by the Securities and Exchange Commission. They primarily hold a basket of stock mutual funds or stock ETFs as well as bond mutual funds and other conservative investments. These “funds of funds” have been around for close to 30 years, but it wasn’t until the early 2000s that they became popular, eventually becoming the preferred default investment option for employer-sponsored retirement plans. According to recent data from the Investment Company Institute, 68 percent of 401(k) plan participants invest in them. The option is also open to retirement savers with IRAs.
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Outside of the mutual fund structure, target-date funds can also be set up as collective-investment trusts — pooled investment accounts managed by a bank or trust company that can be offered only via a qualified employer-sponsored retirement account. They, too, hold a mix of stocks, bonds and other investments, but they are cheaper to operate, which enhances their appeal. However, they aren’t regulated by the SEC.
What’s the purpose of target-date funds?
Promoted as a “set-it-and-forget” strategy, the funds take the guesswork out of investing. Instead of savers picking various stocks and bonds to create a retirement portfolio, and making changes as they wish, the target-date fund does all the work and readjusts (or “rebalances”) this mix over time. It’s a strategy that deliberately avoids the paralysis of decision-making that often seizes people when they are presented with too many options.
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Retirement savers typically pick their fund date based on what year they will turn 65. The younger the saver, the more heavily invested the fund is in stocks. As that investor ages, the mix shifts toward bonds to eventually mimic the “60/40 portfolio,” which refers to the ratio of stocks to bonds or other fixed-income investments seen as appropriate upon retirement.
The strategy follows the ethos that younger investors can and should be willing to take on more risk because they have more time to recover from market downturns. The key is that this rebalancing is all done automatically.
Do target-date funds offer enough transparency about risk?
The market turbulence of recent years has caused some investors and experts to give target-date funds closer scrutiny. In March, the Government Accountability Office recommended that the Labor Department update its guidance on target-date funds to employer plan sponsors — on grounds that the original language lacked details concerning collective investment trusts and other issues around funds’ structure as they relate to performance.
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Less risk doesn’t prevent balances from dipping when markets go haywire, and investments once considered conservative start to wobble. For example, Vanguard’s 2025 target retirement fund — which had a 55/45 percent split at the time — lost 15.5 percent of its value in 2022, according to the financial services firm Morningstar. For comparison, the Bloomberg U.S. aggregate bond index lost 13 percent. Both the bond index and the fund bounced back in 2023. However, the target date fund clawed back less of its 2022 losses, gaining only 14.5 percent.
In Morningstar’s annual analysis of target date funds, meanwhile, the entire 2025 fund category lost on average 15 percent in 2022. In comparison, the 2055 fund category lost 18 percent on average — but that was more heavily exposed to stocks.
In other words, the soon-expiring funds provided something of a buffer — but investors who needed their money sooner for retirement had less time to recover portfolio losses.
What should retirement savers do?
Most experts say younger retirement savers should invest in these funds. But once they inch closer to retirement, particularly from age 50, a more tailored approach is needed. In short, savers need to find stability outside of bonds.
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Another issue is account drawdowns, which must be taken proportionally from both sides of the fund. An investor needs to be careful about where to go for income if they consider withdrawals — they may not want to sell out of those stocks — but the target date fund withdrawals can’t account for that, says Christine Benz, director of personal finance and retirement planning for Morningstar.
On top of that, savers should assess their tolerance for risk. A target date fund may not be de-risking fast enough to fit a client’s new tolerance for volatility, says Daniel Masuda Lehrman, a CFP based in Honolulu, adding, “Retirement is like climbing a mountain in the sense that climbing down the mountain can be more treacherous than climbing up.”
With the bond market being exposed, savers may want to park a portion of their money into less volatile investments such as certificates of deposits and high-yield savings accounts — but for others with a defined-benefit pension, an IRA or Roth IRA, it’s good to consider whether their target date fund is too conservative, Bovard says.
Clients grasp the uncertainty that is stock investing, but they don’t understand that bonds and bonds funds still carry some risk, says Lindsey Young, a CFP in Baltimore. The sharp decline in bonds’ value that led to sell-offs “was really the first time in 30 or 40 years that we’ve gone through a tough stretch of the bond market,” she points out.
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