Make Sure Your Target Date Fund Is Playing Offense and Defense

To grow long-term wealth, target date funds (TDFs) need an aggressive glide path with meaningful equity exposure to manage longevity risk. However, they also need to be conservative to protect against short-term market volatility. Ron Cohen, head of RIA and DCIO Sales at Wells Fargo Funds, said it’s a tough, but ultimately achievable dual mandate. 'You are starting to see mutual fund companies and target date providers utilizing more sophisticated tools where they can stay invested in equities later on in life, but be able to have risk tools in place to make sure you are protecting those participants,' said Cohen. An income replacement rate of 80% of one’s pre-retirement income is a widely recommended retirement planning objective. Nevertheless, the average target date glide path delivers this only 58% of the time, according to Wells Fargo Funds. The income in a target date fund is usually generated from the fixed income side of the portfolio. If interest rates are indeed heading higher, this will certainly put the bond allocations in target date funds under pressure. Cohen said some providers are starting to use other yield-based vehicles as a substitute for bonds, both for yield and protection against a rise in interest rates.