Target Date Fund Upcoming Pitfalls

Target date funds continue to make news, in part because a large percent of their assets (particularly for older participants) are long-term bonds.  Many or perhaps most participants view bonds as being relatively safe investments, and do not expect value decreases.  However, as interest rates rise, value decreases will be experienced.  While the interest payments on the bonds will reduce losses, it is still likely that overall losses will be experienced.  If the participants have already retired and begun “drawing down” their accounts, losses will be experienced while accounts are being reduced by distributions.  It is likely that the losses will eventually give rise to many class action lawsuits.  I think it is better to avoid target date funds and offer various fund options (including possibly bond funds), while thoroughly discussing (in the SPD, etc.) risks and historic interest rates in easily understandable terms.