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Investors face many risks when it comes to saving for retirement. According to a new PGIM Investments survey, inflation sits at the top of that list, with 35% indicating inflation risk the biggest threat to successful retirement outcomes for their clients.
Longevity risk and market risk followed with 23% and 21%, respectively.
But how will inflation impact investors in target-date funds?
“High inflation can be incredibly disruptive to both plan sponsors and plan participants alike, putting additional pressure on successful retirement outcomes and eroding investors’ purchasing power,” says Jeremy Stempien, co-portfolio manager of the Prudential Day One Funds.
Investors in target-date funds may want to consider products that have higher allocations to assets that historically have performed well during inflationary periods – like TIPS, commodities and real estate.
PGIM Investments’ quarterly survey of more than 400 financial advisors focused on seeking perspectives around retirement and target-date funds.
Target-date funds should work to mitigate drawdowns; ESG not as important
When evaluating target-date funds, advisors say the most important criteria to them and their clients is that the fund is “working to mitigate drawdowns in equity market sell offs.” Protecting against longevity risk through an allocation to a lifetime income solution followed closely behind.
Interestingly, advisors ranked “incorporates my client’s values through ESG integration” as the least important when it comes to evaluating target-date funds.
“Considering the current market environment, it makes sense that protecting client assets are top of mind for advisors at this point,” said Stempien.
In addition, market volatility may have advisors re-thinking their investments, with 68% saying they are at least somewhat likely to evaluate target-date fund providers for their clients over the next 12 months.
About the Survey
These survey questions were part of Escalent’s Cogent Beat™ Advisor data collection and included responses from a representative sample of 420 financial advisors. Data was collected between August 24 to September 7, 2022.
Investing involves risks. Some investments have more risk than others. The investment return and principal value will fluctuate and the investment, when sold, may be worth more or less than the original cost and it is possible to lose money. Past performance is not a guarantee of future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets.
The target date is the approximate year in which investors plan to retire. The funds are designed for investors who plan to gradually withdraw assets from the fund over a moderate time period following retirement. Each fund invests in underlying funds that provide exposure to fixed income, equity and non-traditional asset classes. The asset allocation of the target date funds will become more conservative as the target date approaches and for ten years after the target date by lessening the equity exposure and increasing the exposure in fixed income investments. The principal value of an investment in a target date fund is not guaranteed at any time, including the target date. There is no guarantee that the fund will provide adequate income through retirement.
A target date fund should not be selected solely based on age or retirement date. Before investing, participants should carefully consider the fund’s investment objectives, risks, charges and expenses, as well as their age, anticipated retirement date, risk tolerance, other investments owned, and planned withdrawals.
The stated asset allocation may be subject to change. It is possible to lose money in a target date fund, including losses near and following retirement. These risks may be increased to the extent investors begin to make withdrawals from the fund significantly before the target date. Investments in the funds are not deposits or obligations of any bank and are not insured or guaranteed by any governmental agency or instrumentality. For investors close to or in retirement, the fund’s equity exposure may result in investment volatility that could reduce an investor’s available retirement assets when they are needed. For investors farther from retirement, there is a risk that a fund may invest too much in investments designed to ensure capital conservation and/or current income, which may prevent the investor from meeting his/her retirement goals.
Prudential Day One Funds may be offered as: (i) collective investment trust funds established by Prudential Trust Company, as trustee, a Pennsylvania trust company located in Scranton, PA and a Prudential Financial company, and (ii) registered mutual funds offered through Prudential Investment Management Services LLC (PIMS), Newark, NJ, a Prudential Financial company. Prudential Trust Company is solely responsible for its own contractual obligations and financial condition. Offers of the collective investment trust funds may only be made by sales officers of Prudential Trust Company.
The Day One Funds, as collective investment trusts, are investment vehicles available only to qualified retirement plans, such as 401(k) plans and government plans, and their participants. Unlike mutual funds, The Day One Funds, as collective investment trusts, are exempt from Securities and Exchange Commission registration under both the Securities Act of 1933 and the Investment Company Act of 1940, but are subject to oversight by state banking or insurance regulators, as applicable. Therefore, investors are generally not entitled to the protections of the federal securities laws
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