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The Changing Landscape of Target-Date Funds: Are They Still Effective for Your Retirement?

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For years, target-date funds have been a popular choice for retirement investors. The appeal is clear: invest in a target-date fund, and a manager will adjust your asset allocation as you approach retirement, so you don’t have to. Often marketed as “set-it-and-forget-it” options, they are akin to the slow cooker of retirement savings strategies—simply add your ingredients (money), and when you’re ready, enjoy a fully funded retirement account.

However, recent findings from a survey conducted by retirement plan provider TIAA suggest that employers are increasingly skeptical about the effectiveness of target-date funds in meeting their employees’ retirement needs.

What Are Target-Date Funds?

Target-date funds (TDFs) are specialized investment vehicles generally available only through retirement plans like 401(k)s. Investors select a TDF based on their expected retirement year, typically offered in five-year increments (e.g., a 2050 TDF for those planning to retire around that year).

These funds aim to grow wealth by investing in a diversified portfolio, with a key feature being the “glidepath.” The glidepath adjusts the fund’s asset allocation as the target retirement date approaches. Early in your career, the fund focuses on growth through stock investments. As retirement nears, it shifts towards wealth preservation, investing more in bonds and other fixed-income securities. Without a TDF, investors would need to manage these adjustments themselves, making TDFs a convenient option.

TIAA’s Survey Insights

Despite their popularity, TIAA’s recent study reveals a decline in confidence among plan sponsors regarding TDFs’ effectiveness. According to the survey:

  • Only 66% of plan sponsors believe that TDFs will help their employees prepare for retirement, down from 78% in 2020.
  • Colbert Narcisse, Chief Product and Business Development Officer at TIAA, noted that employers are recognizing critical shortcomings in traditional TDFs. Employers now seek retirement offerings that safeguard employees’ savings and provide options for guaranteed monthly income for life.
  • The study also highlights other concerns:
    • 66% of employers worry that their employees aren’t saving enough, up from 57% in 2020.
    • 77% of employees prioritize saving for retirement.
    • 51% of employees report increased anxiety about retirement savings due to the pandemic.

The survey, which polled over 1,500 employers and employees, underscores the need for more personalized retirement solutions that include guaranteed income options and help mitigate portfolio volatility in a rising interest rate environment.

The Bottom Line

While target-date funds remain a popular option for retirement savers, the growing skepticism among plan sponsors suggests they might not be the best fit for everyone. Additionally, the ongoing impact of the pandemic has heightened anxiety about retirement readiness among 401(k) participants.

If you’re concerned about managing your retirement savings, consider working with a financial advisor who can provide personalized guidance and help you navigate the complexities of retirement planning. At Secure Retirement Strategies, we are here to support you in making informed decisions to ensure a financially secure future.

For more insights and personalized retirement planning advice, contact Secure Retirement Strategies today. We’re dedicated to helping you achieve your retirement goals with confidence.

 

Original source: Wealth Advisor; November 2022