Older workers who are using target-date funds as the primary vehicle for saving in their 401ks are facing a difficult reality.
An article in Bloomberg’s Businessweek, titled Target-Date Funds’ Risky Balancing Act, discusses the problem that the current low interest rate environment presents for investors.
As interest rates eventually move up, bond prices will suffer because they move inversely to interest rates. This is creating a dilemma for target-date fund managers as the strategy of these funds is to move more into bonds as the investor’s retirement date approaches.
Largest Target Date Providers
Fidelity, the largest provider of 401k plans, recently announced that it would increase the allocation to equities by 15% in its target-date offerings for investors under the age of 67.
The fact that managers of these funds are adding more equities to the mix than they would in a more normal environment should give investors pause as they consider their goals for retirement.
Target-date funds were designed to be a “hands-off” way for the average investor to save for retirement while maintaining an appropriate allocation to risk as they age. The problem is that every investor’s goals are unique to them. A particular target-date strategy may be appropriate for one person, but not another even though they are retiring in the same year.
The challenges of the current low interest rate environment are not just facing target-date fund managers. Bill Gross, the manager of Pimco Total Return, the world’s biggest bond fund, declared that the 30 year secular bull market in bond’s came to an end last spring.
However, a well-executed investment strategy should include an allocation to fixed income, especially for those nearing or in retirement. We believe that it is important to consider your unique situation and employ your resources with that in mind. A “one-size fits all” approach may wind up making you feel a bit exposed.
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Photo credit: Flickr – Nina Matthews
