Target date funds have recently become popular as default investments for retirement plans. A mix of stocks and bonds under the supervision of an investment manager, the ratio of assets held to optimize the risk stability of the portfolio changes as the participant nears their “target date” for retirement. In particular, the ratio of bonds to stocks increases. A recent Wall Street Journal article pointed out the danger of relying on these target date funds that have high ratios of bonds to stocks. Interest rates have been at an all time low in recent years but they aren’t expected to stay that way. As interest rates rise, the value of those bonds with low interest rates will drop in value. This drop in value could negatively affect participant retirement security if their portfolio is heavily invested in bonds in anticipation of approaching retirement. After the market tanked in 2008, most are aware of the risks associated with stock ownership.
How many participants are aware of the risks associated with bonds and this current market?