Is Your Target-Date Fund Providing Enough Inflation Protection? (2023)

Inflation has been on the rise recently, raising concerns about long-run inflation and its impact on the spending power of those who can least afford it—investors approaching or already in retirement. Target-date funds, owned by many defined contribution (DC) plan participants, are designed to simplify investment decisions and reduce principal risk as investors edge toward retirement.

(Video) The Problem With Target Date Fund Investing

But will target-date funds really help participants retain their spending power in inflationary times? There are strategies to help retirement portfolios guard against inflation, and they’re more critical today than ever before—but with inflation dormant for so many years, not every target-date fund is similarly equipped to be an inflation fighter.

Is Inflation Really a Threat? A Closer Look

It’s been years since investors have needed to incorporate inflation in their investment plans. But as the global economy climbs its way out of the pandemic-induced recession, the demand for goods and services is increasing faster than supply. Prices are rising, and inflation is real—particularly in the US.

Today’s inflation spike is transitory, in our opinion: supply and demand will eventually come into balance as supply chains are unkinked. But, over the longer-term, structural factors and policy regimes may push inflation higher than it’s been in recent experience.

Investors nearing retirement today were children or young adults the last time inflation was a major concern. While we don’t believe this bout of inflation will be anything like the 1970s, that era does provide a good illustration of inflation’s pain. Between 1972 and 1982, inflation averaged 9%, inflicting a 30% inflation-adjusted loss on a classic 60/40 portfolio. What if an investor was retired and also spending 4% of portfolio assets per year during this time? The portfolio value in real terms would have dropped by 65% (Display).

Inflation: Difficult to Predict, Harmful when It Hits

Is Your Target-Date Fund Providing Enough Inflation Protection? (1)

Historical analysis and forecasts do not guarantee future results. Past performance does not guarantee future results.
*Real returns displayed are cumulative returns. This is a hypothetical example and is not representative of any AB product. An investor cannot invest directly in an index or average, and they do not include sales charges or operating expenses associated with an investment in a mutual fund, which would reduce total returns. Assumes a 60/40 stock/bond allocation, with 4% annual spending rate on initial portfolio value (spending grown with inflation). Inflation is represented by the respective inflation indices of the US, the UK and Japan. Stocks in the US are represented by the S&P 500 Index, in the UK by the FTSE All-Share Index and in Japan by the Nikko Securities Composite. Bonds are represented by the 10-year government bond indices of the US, the UK and Japan.
As of June 30, 2021
Source: FTSE, Global Financial Data (GFD), Philadelphia Federal Reserve, SMBC Nikko Securities, S&P, US Bureau of Labor Statistics and AllianceBernstein (AB)

(Video) Target Date Funds | Should You Invest In Them?

Of course, inflation doesn’t have to be 1970s-style to jeopardize a retirement plan. Inflation spikes might not often happen, but they can be particularly detrimental for retirees who are drawing on their assets. In the short run, pent-up consumer demand, combined with supply friction, should keep inflation higher than normal. Even as supply lines are restored, fiscal and monetary policy will continue to flow into the real economy.

The longer-term outlook for prices will be greatly influenced, in our view, by structural factors such as demographics, technological progress and populism, not to mention the policy regime itself. When combined, these factorswill likely increase the probability of higher inflation in the future. How target-date funds are equipped to handle it is an all-important consideration for DC plans.

(Video) Do NOT Buy Target Date Funds - Here is Why

What Does It Take to Protect a Portfolio from Inflation?

Some target-date funds have tried to solve for inflation by including Treasury Inflation-Protected Securities (TIPS) in their bond allocations. While TIPS can offer some relief from price hikes, they have a downside, too. Investors give up income when TIPS are substituted for bonds—TIPS yields are almost always lower than those of comparable Treasury bonds. So, while an allocation to TIPS can make sense, they won’t provide enough protection on their own when inflation strikes.

Most target-date funds rely primarily on TIPS, counting on a combination of TIPS and equity exposure, which can have inflation-fighting capability. We believe that target-date funds can—and should—do better. There’s no silver bullet to slay inflation—no single asset is a perfect weapon—but we believe that a diversified mix of growth-oriented and inflation-sensitive assets can provide an answer to the inflation problem.

Target-date funds that include a blended bundle of inflation-sensitive real assets in their portfolios— such as commodities, real estate, natural resource stocks and infrastructure—have fared much better than a traditional 60/40 portfolio, or even a 60/40 portfolio that includes TIPS during this year’s inflation run up (Display).

Real Assets Protect Portfolios During Inflationary Periods

Year-to-Date Performance Through June 30, 2021

Is Your Target-Date Fund Providing Enough Inflation Protection? (2)

Past performance does not guarantee future results. These returns are for illustrative purposes only and do not reflect the performance of any fund. Diversification does not eliminate the risk of loss. Historical analysis is not a guarantee of future results.
This is a hypothetical example and is not representative of any AB product. Individuals cannot invest directly in an index.
Traditional 60/40: 60% stocks, 40% bonds; 60/40 portfolio with real bonds: 60% stocks, 30% diversified bonds, 10% real bonds; 60/40 with real bonds and real assets: 45% stocks, 15% real assets, 30% diversified bonds, 10% inflation linked bonds
Diversified stocks: MSCI World Index; bonds: BloombergBarclays US Aggregate Bond Index; real bonds: BloombergBarclays US Govt Inflation Linked 1–-10 Year Index; real assets: 30% commodity futures, 20% natural resource equities, 30% real estate stocks, 20% MSCI world with CPI swap overlay
Source: Barclays, Bloomberg, Dow Jones, FTSE, GFD, GSCI, HSBC, Kenneth R. French, OECD, S&P and AB

(Video) Is Your Portfolio Diversified Enough?

The allocation to real assets marginally decreases the equity exposure; if inflation is muted or absent, that lower equity exposure can cause performance to lag. But we think forgoing some upside to protect retirement savings from the potential devastation of inflation is a sensible choice. The difference real assets can make in a portfolio performance during inflation is striking.

Inflation-Sensitive Assets Aren’t One Size Fits All

Of course, investors’ needs change as they move toward retirement, and the mix of inflation-fighting assets should evolve to address these needs. The risk, return and inflation-sensitivity of real assets vary, so the mixture should change as investors get closer to retirement.

(Video) 4 Reasons to AVOID Target Date Funds in your Retirement Portfolio

For younger investors, the allocation to inflation-sensitive assets is more about diversification, because their equity exposure should outpace inflation over very long horizons. Investors approaching or in retirement, in contrast, need more defense against inflation. Their inflation protection should not only be a bigger portion of their portfolio but also increasingly focused on assets most responsive to inflation.

Within target-date funds, managers should be making these types of adjustments, but many don’t. Some funds may include a token allocation to TIPS or hold a smattering of real assets, but few go far enough, in our opinion. We think inflation fighting deserves a more thoughtful approach tailored to an investor’s position in their lifecycle.

As inflation comes back into the retirement savings conversation, DC plan sponsors should take a close look at their target-date funds to ensure they have the most effective tools to keep the ravages of inflation at bay. If inflation risk hasn’t been a focus in 2021, it’s probably exacted a toll on performance.


Is target-date fund enough? ›

Target-date funds can be a helpful tool to reach retirement without having to make any investment decisions. If they help you invest and stay invested throughout your career, they can be a great tool. But investors, particularly retirees, should explore all their options to ensure a target-date fund is right for them.

What are the disadvantages of target-date funds? ›

They May Charge High Fees

Not only might you end up on a glide path that doesn't fit your specific needs, but you might have to pay more for the pleasure of doing so. Take the Fidelity Freedom 2060 Fund, a well-regarded target date fund with a 0.75% expense ratio.

Why not to invest in target-date funds? ›

Another problem with target-date funds is that they adjust the weightings based on your retirement year, when, in fact, your finish line is the day you die. Because of that, the fund might end up too conservative, leaving you with a lot of money lost in fees and not enough gains to retire in the way you would like.

Do target-date funds outperform the S&P 500? ›

Target-Date Fund vs Index Funds FAQs

In bull markets, index funds that track the S&P 500 tend to outperform target-date funds. However, during times of high volatility, equity index funds will generally lose more in value than target-date funds, which are more conservative.

How risky is a target-date fund? ›

Target-date funds do not provide guaranteed income in retirement and can lose money if the stocks and bonds owned by the fund drop in value.

What is the average return on a target-date fund? ›

Those with 33% to 43% equity averaged 7.7% annualized; funds with 30% to 33% equity averaged 6.5%; funds with 25% to 30% equity averaged 6.3%; and funds with 11% to 21% averaged 4.9%.

Why are target-date funds so popular with retirement investors? ›

Target-date funds provide a simple way to save for retirement. They offer exposure to a variety of markets, active and passive management, and a selection of asset allocation. Despite their simplicity, investors who use target-date funds need to stay on top of asset allocation, fees, and investment risk.

What are the pros and cons of target date mutual funds? ›

3 cons of target-date funds.
  • 3 Pros of Target-Date Funds. Simplicity. The biggest advantage of a target-date fund is simplicity. ...
  • 3 Cons of Target-Date Funds. Flawed assumptions. However, the generalized, one-size-fits-all nature of target-date funds can leave investors exposed during unusual economic conditions.
Aug 15, 2022

Why do target-date funds underperform? ›

A problem with target-date funds is that buried in some of the mutual funds in a target-date fund may be riskier securities than the investor can tolerate. Examples are stock in companies that are in the emerging market, foreign bonds or junk bonds.

What are the most aggressive target-date funds? ›


Rowe Price take the cake as the most aggressive. The firm basically created the concept of a through-fund. The selected vehicle won't reach its most conservative allocation until 30 years after an investor stops working.

Why are Fidelity target-date funds so expensive? ›

Make no mistake about it, these higher-touch products come at a higher cost. Quite often, target date funds can charge higher fees than mutual funds because they pass through not only the underlying mutual funds' fees, but also their own management fees.

How do you make money with target-date funds? ›

Target-date funds are structured to maximize the investor's returns by a specific date. Generally, the funds are designed to build gains in the early years by focusing on riskier growth stocks, then they aim to retain those gains by weighting towards safer, more conservative choices as the target date approaches.

Is a 401k index fund better than a target date fund? ›

Index funds offer more choices and lower costs, while a target-date fund is an easy way to invest for retirement without worrying about asset allocations. Index funds include passively-managed exchange-traded funds (ETFs) and mutual funds that track specific indexes.

Which is better target-date funds or index funds? ›

Index funds outperform most actively managed target-date funds. They are good for investors who are risk-averse and have a long time horizon. Target-date funds may be tax-advantaged, however, since they are approved for inclusion in 401(k)s. However, they require an investor to stick with one fund family.

Should I choose managed account or target date fund? ›

If you are looking for the quickest/easiest strategy, a target date fund may be a good choice. For those looking to personalize their portfolio to match their own lifestyle and goals, it is always a good idea to have a trusted financial professional managing the account.

Should you have your entire 401 K in a target-date fund? ›

There's nothing wrong with putting your 401(k) into a target date fund, especially if you're a set-it-and-forget-it type of investor. But before you rely on a target date fund, consider the upside of branching out into index funds. You might enjoy stronger growth and lower fees -- a winning combination.

Are target date funds bad for taxable accounts? ›

Multi-Asset Funds: Multi-asset funds like target-date funds and balanced funds will also tend to be a poor fit for taxable accounts and are much better off housed in a tax-sheltered account like an IRA or 401(k). That's because they typically hold taxable bonds (see above).

What happens when a target-date fund matures? ›

Nothing special happens with a Target Retirement Fund when it reaches its target date. The fund doesn't stop investing, and you don't need to take your money out of the fund. The gradual move from stocks to bonds simply continues.

Is target date a portfolio or fund? ›

A number of companies offer “target date retirement funds,” sometimes referred to as “target date funds” or “lifecycle funds.” Target date funds, which are often mutual funds, hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund's investment strategy.

What is a good target rate of return? ›

A good return on investment is generally considered to be about 7% per year, based on the average historic return of the S&P 500 index, and adjusting for inflation.

What is a target date fund and why is it a good investment? ›

A target-date fund is a mutual fund (or exchange-traded fund) that gradually rebalances and reallocates assets as you get closer to retirement, typically shifting the majority of assets from riskier investments such as stocks to more conservative investments such as bonds and cash.

What are the two factors you should consider when choosing which target-date fund? ›

Expenses and glide path are just two factors that investors should consider.

What is the minimum investment per target-date fund? ›

Each fund is designed to manage risk while helping to grow your retirement savings. The minimum investment per Target Retirement Fund is $1,000.

Do target-date funds have double fees? ›

Associated Costs

That is a pretty substantial amount for a fund that is passive in nature. You should also be wary of being charged twice in a TDF. Since these funds are made up of other funds that also have separate expense ratios, you will need to look into these funds and make sure they do not double-dip.

What are 3 disadvantages of mutual funds? ›

Mutual Funds: An Overview

Disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

Why are Vanguard Target retirement funds down? ›

It was caused by a huge capital gain payout. Basically, investors were all paid a large chunk of cash and the share price was lowered to reflect that payment.

When did target-date funds become popular? ›

1 Some of the earliest TDFs were developed in the mid- 1990s and many fund managers now offer a series of lifecycle funds. Evidence suggests that 70 percent of U.S. employers now use target-date funds as their default investment (Collins, 2009).

What is the best 2030 target-date fund? ›

Here are the best Target-Date 2030 funds
  • T. Rowe Price Retirement I 2030 Fund.
  • American Century One Choice Blend+ 2030.
  • Natixis Sustainable Future 2030 Fund.
  • State Street Target Retirement 2030 Fund.
  • Putnam Sustainable Retirement 2030 Fund.
  • Putnam Retirement Advantage 2030 Fund.
  • T. Rowe Price Retirement Blend 2030 Fund.

What is the difference between target risk funds and target-date funds? ›

Unlike target-date funds that reduce risk over time, target-risk funds usually maintain their risk level indefinitely.

What should a 55 year old asset allocation be? ›

As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.

What is the Vanguard approach to target-date funds? ›

Vanguard offers target-date retirement funds to suit the needs of investors of various ages. A target-date fund is a mutual fund that automatically adjusts the asset mix and allocation over a time period that's based on your age and when you want to retire. The information in this article is current as of July 3, 2021.

What percentage of 401k assets are in target-date funds? ›

Target date fund assets were more than one-quarter (27 percent) of 401(k) plan assets in the database. » Target date funds offer professional management of a diversified portfolio that rebalances over time.

Can you sell a target-date fund anytime? ›

"It depends on your needs." But no matter how many years are left in a target-date fund, the glide path will be gradual. If you need to sell a target-date fund at any time, you shouldn't have to pay exit fees. But if you invested in a taxable fund, there may be tax penalties for withdrawal.

How often do target date funds pay dividends? ›

FAQs about target-date funds

Although every target-date fund works in different ways, most target-date funds do pay dividends. Most pay dividends once per year.

What is the oldest target-date fund? ›

Wells Fargo and Barclays Global Investors, working together at the time, rolled out the first target date funds in March 1994.

Do index funds outperform 401k? ›

A 401(k) account's major edge over an index fund is the tax advantage. Contributions to 401(k) accounts are pre-tax. Owners don't pay taxes on dollars they put in or the earnings from their investment portfolio until they start withdrawing funds.

What is the difference between Robo Advisor and Target Date Fund? ›

While you'll answer a questionnaire to determine your investments with a robo-advisor, target date funds are much simpler, providing the same diversified asset allocation strategy for everyone based on how many years they have until they reach retirement age.

Does Charles Schwab have target-date funds? ›

With Schwab Target Date Funds, Schwab Asset Management reallocates the fund's investments along what is called a "glide path," moving from more aggressive to more conservative as the target date approaches and beyond, helping to reduce risk and prepare you for retirement.

Is there anything better than index funds? ›

The capital gains taxes you'll pay

ETFs are more tax-efficient than index funds by nature, thanks to the way they're structured.

What are the best performing mutual funds year to date? ›

Top Mutual Funds
SymbolNameYTD Return
FSPTXFidelity Select Technology Portfolio34.21%
BTEKXBlackRock Technology Opportunities Fund Class K20.05%
BGSCXBlackRock Technology Opportunities Fund Investor C Shares24.21%
BSTSXBlackRock Technology Opportunities Fund Service Shares24.58%
21 more rows

What is the average return on target-date funds? ›

Those with 33% to 43% equity averaged 7.7% annualized; funds with 30% to 33% equity averaged 6.5%; funds with 25% to 30% equity averaged 6.3%; and funds with 11% to 21% averaged 4.9%.

Should you have your entire 401 K in a target date fund? ›

There's nothing wrong with putting your 401(k) into a target date fund, especially if you're a set-it-and-forget-it type of investor. But before you rely on a target date fund, consider the upside of branching out into index funds. You might enjoy stronger growth and lower fees -- a winning combination.

Are target-date funds better than index funds? ›

Index funds offer more choices and lower costs, while a target-date fund is an easy way to invest for retirement without worrying about asset allocations. Index funds include passively-managed exchange-traded funds (ETFs) and mutual funds that track specific indexes.

Why you shouldn't max out 401k early in the year? ›

It's never too early to set up a 401(k)—but there's no real benefit in maximizing your contribution as quickly as possible when offered an employer match. By maximizing your 401(k) annual contribution at the beginning of the year, you could miss out on your employer's maximum matching contribution.

Should I choose managed account or target-date fund? ›

If you are looking for the quickest/easiest strategy, a target date fund may be a good choice. For those looking to personalize their portfolio to match their own lifestyle and goals, it is always a good idea to have a trusted financial professional managing the account.

Do robo advisors outperform the S&P 500? ›

No, Robo Advisors do not beat the market when compared to the S&P 500 index. Robo Advisors use algorithms not to beat the market but to automatically invest your money based on your requirements and risk tolerance.

Can you move money out of a target-date fund? ›

You can take money out of a target-date fund because they are no different from any other type of mutual fund. A target-date fund is different from a retirement account like a 401(k) or an IRA where there can be an early withdrawal penalty if you withdraw funds prior to age 59 1/2.


1. Balanced Funds vs Target Date Retirement Funds [Retire on Autopilot?]
(Nick Doyle - Achieve Financial Independence)
2. Talk Your Chart | Inflation & target-date mutual funds | Episode 13
(Evensky & Katz / Foldes Wealth Management)
3. Investing Insights: Why You Should Know These Popular Target-Date Fund Providers
(Morningstar, Inc.)
4. Vanguard LifeStrategy vs Target Date Retirement Funds (Rate My Portfolio)
(Rob Berger)
5. The Simple Story About 2 Funds for Life
(Paul Merriman)
6. Off Target? An In-Depth Look at Target-Date Investing
(Boston University)


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