Retirement at Risk.

The Hidden Risk to Retirees 

The day is finally here. She is ready to say goodbye to the anxiety. A 37-year career comes to an end in May. 

Elizabeth is one of the rare few who survived the corporate rat race long enough to enjoy the perks in that shiny brochure fashioned by HR every year.  Her retirement plan coordinator reached out to go over the options available, including retiree health coverage eligibility, 401(k) options, etc.  Everything is designed to make the transition to the next chapter look easy.

But she has the same problem as every other retiree since pensions have gone the way of the woolly mammoth.  The responsibility of income generation falls on her shoulders. She must convert her fixed assets into a lifetime of cash flow.  To recreate the paycheck, the 401(k) will carry the brunt of the responsibility, so the investment allocation really matters now.

As an advisor, we do our best to help with 401(k)s, but the investment options are limited, sort of like a buffet. You will never starve, but nobody walks away saying, “That was the best meal I ever had!” Investment choices inside the 401(k) are homogenized to serve everyone from the front-line worker to the CEO. And that formula leaves everyone unsatisfied but never hungry.

Elizabeth was a new client to us, reaching out because she needed help mapping out the transition.  Upon review of her investment allocation, 100% of her $1.5 million 401(k) was invested in a Target Date 2035 Fund!  

It only took one chart to show her why that decision put her at risk.

And the story follows…

What are Target Date Funds?

Target date funds (TDFs) were invented in the early 1990s to serve the “do‑it‑for‑me” retirement investor who didn’t have the time, interest, or confidence to design and manage their own asset allocation. 

At their core, target date funds are just funds‑of‑funds built around a glide path, a schedule that dials you down from mostly growth to mostly “safe” assets as you age.  

Target date funds were built to simplify investing by gradually shifting from a growth-focused mix to a more conservative allocation as retirement approaches.

In simple terms, when you are young, the fund holds mostly stocks for growth, and as you age, it automatically shifts more money into bonds to reduce risk.

Chart 1: Typical Target Date Fund Glide Path. Illustrative glide path showing equity exposure starting near 90% in early career, then stepping down toward a bond‑heavy mix as retirement approaches and progresses.

How Target Date Funds Work?

In response to the Pension Protection Act of 2006, the Department of Labor was mandated to make Target Date Funds a designated target‑date fund as a type of Qualified Default Investment Alternative(QDIA). 

As long as a company meets the QDIA rules, they have relief from liability for losses that are the direct and necessary result of investing in the QDIA.  Companies could default non‑choosers away from cash and into professionally designed, diversified portfolios that start equity‑heavy and gradually de‑risk as retirement approaches.

Prior to the law change, most 401(k) participants who failed to make an active choice historically ended up in money market or stable value funds, which left them underinvested in growth assets for decades.

This framework solved a noble problem by moving inert savers out of cash and into long‑term investments aligned with their time horizon.

Over the subsequent 20 years, TDFs became the four trillion‑dollar default option embedded in most workplace plans in the U.S.

The “Safe” Sleeve That Still Bleeds

I reviewed the annualized returns with dividends reinvested for a near‑dated fund versus long-dated funds as part of this analysis.  I used the following analysis with a Vanguard fund to illustrate the problem.  (Note: I am not picking on Vanguard, as all TDFs have the same issue.) 

Over the last 5 years ending March 31, 2026, the Vanguard Target Date 2025 Fund (VTTVX) earned an annualized 5.17%, and a long‑dated fund like Vanguard Target Date 2050 Fund (VFIFX) came in at 8.41% per year.  (Source: Bloomberg)

That gap is exactly what you’d expect: the more conservative fund earns less because it carries more bonds and less equity. It makes sense: you are trading higher returns for “safety.”

The problem shows up when markets actually break.

In 2022, fixed income failed to deliver the downside protection retirees thought they were buying. The struggle is that the “safety” sleeve doesn’t always behave the way most think it will.

Many rely on bonds to cushion market losses, but in 2022, both stocks and bonds fell together.

Morningstar data shows that long‑dated vintages like 2050 lost only slightly more than the 2025 TDFs.  In 2022, 2025‑vintage target-date funds as a group still posted mid‑teens losses, while distant vintages like 2055/2060 did only modestly worse. 

Source: Morningstar, Bloomberg

You gave up several percentage points of annual upside going into that year with the “safer” fund, but your drawdown looked a lot like their longer-dated funds.

That can translate into hundreds of thousands of dollars in lost wealth, which can impact your retirement income projections or, worse yet, force you to delay your desired retirement date. 

In summary, the problem is that these funds may still lose a lot of money, even though they are supposed to be safer near retirement.

Fixed Income: The Risk is Buried Here

I have spent a lot of time looking at the fixed income allocations inside 401(k) menus.  It is a bizarre mix, to say the least. It often leaves me wondering who is actually in charge of designing the “safe” sleeve in the TDF funds. 

It is almost like these people have never witnessed a credit crisis or seen interest rates rise. In reality, most of them have not. 

The last major credit crunch was in the 1970s, when arguably most of the managers had not been born yet.  I was born in 1970, and I only remember petting zoos and park visits. The price of gas and mortgage rates were not a concern for me until much later, so I had to read about it.

To understand fixed income downside risk, it is important to understand the basic principles of bond investing. 

Why Duration is Important

If you buy a bond paying 4%, victory is getting 4% plus your money back if all goes smoothly. The most you can ever earn is exactly 4%.

However, if that issuer defaults or interest rates rise, your downside can be severe. 

In other words, you get no participation when the company crushes it, but you are fully exposed if it doesn’t. 

That asymmetry can be a terrible bargain in a market crash, especially near retirement.  This is really important to understand when analyzing the risk of your TDF.  

To see this in real life, let us look at the biggest target date mutual funds by assets.  The leaders are Vanguard and Fidelity, and they all cluster around a familiar spot: a balanced mix between stocks and bonds with intermediate‑term bond exposure.

Vanguard Target Retirement 2030 (VTHRX), for example, sits near that 60% equity and 40% fixed income mix, and the underlying bond fund's duration estimate is around 6 years.  The Fidelity Target Date 2025 (FQFIX) fund requires more digging. It is roughly a 50% equity and 50% fixed income portfolio, but they don’t disclose duration as a key risk measure. 

I would consider it to be an extremely important volatility measure, so it is a bit surprising that the metric is absent from the page.

Using Bloomberg, we estimate the duration of this portfolio to be around 6% as well. 

Duration is a complex calculation, but thankfully, most funds calculate it for you.  Simply stated, duration is a measure of a bond's interest rate sensitivity expressed as a percentage.

There is convexity, but let's assume it is linear to keep it simple for this purpose.

Duration is the most important thing to understand when assessing bond risk.

If rates rise or fall by 1%, the price of that bond will decrease or increase by the duration percentage.  It is an inverse relationship. A 2% rise in interest rates implies about a 12% price drop for a 6‑year duration bond (6 × 2%).  And the opposite is true if rates decline.

Thinking back to 2021, it was hard to imagine a scenario in 2021 when rates were hovering at 0% that portfolio managers did not stress test for rising rates. Most TDFs cannot make any changes to their duration despite the obvious risk/return relationship. Their inability to adapt cost the investors a lot of money. 

In 2022, VTHRX lost 16.27%, and FQFIX lost 16.56%.  The math makes sense once you understand duration risk.  The bond sleeve did little to protect against the 2022 market drawdown as interest rates rose at the same time.  That is not the kind of outcome most near‑retirees think they have signed up for when they accept the default option based on their age.

Chart 3: Target Date Funds in the Wake of the 2008 Financial Crisis. Illustrative losses showing 2010‑vintage TDFs down roughly 20–30% during the 2008 financial crisis. In 2020–2025 vintages suffered around 11–15% drawdown in the 2022 bear market, despite being marketed as near‑retirement options.

For investors close to retirement, a large market drop can lead to an uncomfortable experience at the exact point in time they need it the most. 

In the 2008 financial crisis, many near-retirees delayed retirement because of these portfolio declines.

All of this leads to a simple, uncomfortable conclusion: leaving your life’s savings in a TDF as you approach or pass retirement is financially risky, especially in a world dominated by unpredictable geopolitical risk and ever-increasing government deficits.

Most people don’t intend to risk their next 10–20% drawdown around their retirement date, but the standard TDF does little to prevent it from happening to you.

The Risk for Near-Retirees

If you are within 5–10 years of retirement, or already in it, the question is not whether your default target date fund is “okay.”

The real question is whether you are willing to stake your last working decade, and the standard of living for the rest of your life, on a structure that gives up limited upside in good years but still exposes you to double‑digit losses in the bad ones.  Most of the time, the answer to this question is a resounding NO. 

Final takeaway

Target date funds are convenient, but investors approaching retirement should not assume they protect during major market downturns. They may expose near-retirees to bigger losses than many investors realize.

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Important Disclosures

Mutual fund performance figures shown are net of each fund’s internal expenses, as reported by the fund company or third‑party data providers (e.g., Morningstar, Bloomberg), and no separate investment management or advisory fees are deducted at the 401(k)-plan level in the performance shown. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost; past performance does not guarantee future results and is not a guarantee of future returns. Performance information is presented for illustrative and educational purposes only and does not represent the results of any specific participant or account, as individual results will vary based on investment selection, timing of contributions and withdrawals, and other factors.

This material is intended for general educational purposes only and is not individualized investment, tax, or legal advice, does not take into account your particular objectives, financial situation, or needs, and is not a recommendation to buy, sell, or hold any security or to implement any specific strategy; before making any investment or distribution decisions under your 401(k) plan, you should carefully review your plan documents and consult with a qualified financial professional.