Reconsidering Target-Date Funds After a Rocky 2022

Advisers and plan sponsors should consider both use and education around target-date funds after 2022 declines, according to new research from MFS.

The set-it-and-forget mentality of target-date funds should be reconsidered this year by advisers and plan sponsors as participants may be reeling from both savings declines and a lack of knowledge about the investment vehicle, according to new research from MFS Investment Management

“2022 was a difficult year for many TDFs, and with negative returns for many near retirement vintages,” Jon Barry, head of client solutions for the investment services group at MFS, said in a brief accompanying the research results. “Investors who thought of these funds as safe investments may have gotten an unpleasant surprise.”

Participants in or near retirement saw different results depending on the level of equity, or stock investments, set in the glide path for their TDF, Barry wrote. In 2022, MFS data indicated that a TDF allocating 70% to equity and 30% to bonds experienced a 13.2% decrease year-to-date return through November 30, 2022, while one allocating 70% to bonds and 30% to equity decreased 10.7%.

“These returns highlight potential differences between a to retirement TDF, where the most conservative allocation typically occurs at the participants’ expected retirement age, and a through TDF, which generally has a higher level of risky assets at the expected retirement age and gradually reduces risk postretirement,” he wrote.

Those results may have surprised participants who didn’t fully understand the decision they were making when setting up their TDF, according to the research.

The survey asked U.S. respondents already invested in TDFs to indicate the extent to which they agreed with various statements. The results showed that workers had a solid understanding for some features—78% understood target-date funds get more conservative by de-risking allocation, from equities to bonds, as workers get closer to retirement and 82% said target-date funds are a good way to diversify with one investment. On the other hand, 75% said target-date funds provided a guaranteed income stream in retirement, 68%, the investments provided a guaranteed rate of return and 63% believed target-dates invested entirely in cash or other low risk investments in retirement.

“Although target-date funds are firmly established in defined contribution menus, questions persist as to whether they can solve the retirement income puzzle,” Barry wrote.

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He does note in the research that TDFs are continuing to evolve to address longevity risk and create better retirement income outcomes. Several TDFs have added annuities or guaranteed lifetime withdrawal benefits, as well as dynamic QDIAs, or TDFs that transition into managed accounts. 

The U.S. results published in the 2023 survey were from the MFS 2022 Global Retirement Survey. The 2022 MFS Global Retirement Survey gathered insights from approximately 4,000 retirement savers across Australia, Canada, the U.K. and the U.S. Data referenced in the 2023 survey represent responses from 1,001 U.S. respondents.

Target-date funds are the dominant investment vehicle for workers with a defined contribution retirement benefit—with 31% of all assets, an Employee Benefit Research Institute research brief shows and 61% of new contributions.