Target-Date Funds Are Showing Why They Can Shine When Inflation and Economic Uncertainty Are High

Rising inflation and the sharpest increase in U.S. interest rates since 1994 have contributed to a widespread sense of unease as many retirement fund participants watch their savings dissolve.

That's the opinion of Nick Della Vedova, a president at NFP Retirement, and Jeff Elvander, chief investment officer at NFP Retirement, who authored an article for MarketWatch.

Uncertainty is an ideal market environment for investors to consider how a target-date fund — equipped with professional management and low maintenance — might fit into their retirement plan. About 40 million Americans currently use target-date funds as a savings vehicle. While many employees end up contributing to a target-date fund because it’s the default option of their 401(k) plans, others consciously select it as a comprehensive strategy to managing retirement savings while rebalancing risk.

Different Demographics Require Different Funds

Since employees must choose from whichever investments their employer offers, it’s important for plan sponsors to invest time in selecting the right ones for a workforce. The goal is to ensure that even unsophisticated investors have a diversified portfolio which will allow them their anticipated post-retirement lifestyle. Plan sponsors and advisers must be diligent about analyzing the available data to make informed decisions on behalf of employees, so that workers can choose the right target-date fund to meet their retirement goals.

Educate Employees About Retirement Planning

Regardless of whether plan sponsors choose target-date funds or an alternative, such as index funds, they should educate employees about their options. Engaging plan participants can empower them to make more informed decisions about which glidepath meets their personal circumstances. Providing glidepath options is a positive step towards better retirement benefits, but must include an education component. By expanding financial literacy, employers can demonstrate respect for their workforce and give them control over their futures, which can improve employee satisfaction and retention.

A carefully vetted target-date fund is the best way to save for retirement for many investors. Built-in portfolio diversity makes them reliable long-term investment tools. Multiple glidepaths allow for increased customization, provided plan participants receive the resources needed to select the appropriate one. Both employers and employees should consider the benefits of target-date funds as a retirement option as long as their specific retirement goals are aligned with the fund profile, and thorough research is part of the fund selection process.

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