Even in Retirment, Target Date Funds Can Deliver Negative Returns

Target Date Funds Can Experience Negative Returns

For millions of 401(k) participants, target-date funds (TDFs) are the default path to retirement. Marketed as a “set it and forget it” solution, these funds adjust their mix of stocks, bonds, and cash over time, aiming to balance growth and safety as you near your retirement year. Yet, a sobering reality has emerged—especially evident in the volatile markets of April 2025: Target Date Funds can deliver negative returns, even when participants hit their target retirement date. This challenges the assumption of a smooth glide into retirement and underscores the need for awareness and alternatives.

The Promise of Target-Date Funds

TDFs are wildly popular, holding over $3 trillion in assets across U.S. retirement plans. Their appeal is simplicity: pick a fund matching your retirement year (say, 2035 or 2050), and it gradually shifts from stock-heavy (for growth) to bond-heavy (for stability) as that date approaches. By retirement, the theory goes, your nest egg is protected from wild market swings, ready to fund your golden years. Employers love them too—about 80% of 401(k) plans offer TDFs, often as the default for auto-enrolled workers.

But the promise isn’t ironclad. The “glide path”—how a fund rebalances—varies widely across providers, and no rule says it must be risk-free by the target date. That’s where the trouble starts.

Negative Returns at Retirement: The Data

Recent market turbulence has exposed this flaw. Take 2022, a brutal year when the S&P 500 dropped 18% and bonds, hit by rising interest rates, fell too. TDFs with 2020 or 2025 target dates—designed for those already retired or nearly there—weren’t spared. Morningstar data showed some 2020 funds lost 10-15% that year, despite being “at target.” Fast forward to April 2025, and volatility is back with a vengeance—stocks are down double digits again, and bonds remain shaky. A 2025 TDF, theoretically at its safest, could still post negative returns if its allocation leans too heavily into equities or if bonds falter.

Why? Even at the target date, many TDFs hold 40-60% in stocks to sustain growth through a 30-year retirement. A fund like Vanguard’s Target Retirement 2025, for instance, might have 50% in equities and 50% in fixed income at its target—a mix that tanks when both asset classes drop simultaneously, as they did in 2022 and could now. Fidelity, T. Rowe Price, and others follow similar “to retirement” glide paths, leaving retirees exposed.

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The Retirement Impact

For a 401(k) participant reaching retirement, negative returns at the finish line are a gut punch. Imagine saving $500,000 by age 65, only to see a 10% loss shave off $50,000 as you start withdrawing. That’s real money—months or years of income—gone when you can least afford it. Sequence-of-returns risk compounds the pain: early losses force bigger withdrawals from a smaller base, depleting the account faster. A 4% withdrawal rule on $500,000 yields $20,000 annually; on $450,000, it’s $18,000, stretching budgets thin.

This isn’t hypothetical. A 2019 Vanguard study noted that TDFs near their target date could lose 20% or more in a severe downturn, which wouldn't match the “safe landing” many participants expect. With 2025’s market echoing 2022’s woes, retirees relying on TDFs face a stark reality: the fund that carried you to retirement might not cushion the fall.

Why It Happens

TDFs aren’t broken—they’re just not bulletproof. Several factors drive this risk:

- Stock Exposure: Even conservative TDFs keep significant equity stakes at the target date to combat inflation and longevity risk, leaving them vulnerable to crashes.

- Bond Sensitivity: Rising rates hammer bond prices, and 2025’s uncertain rate environment keeps fixed-income holdings shaky.

- One-Size-Fits-All Design: Glide paths don’t account for personal risk tolerance or market timing—your fund doesn’t know a downturn’s coming.

- Correlation Risk: When stocks and bonds fall together (as in 2022), diversification fails, and TDFs bleed.

What Participants Can Do

The good news? You’re not stuck. Here’s how to mitigate the risk of negative returns at retirement:

1. Check Your Allocation

Log into your 401(k) and review your TDF’s current stock-bond mix. A 2025 fund with 60% stocks might be too aggressive if you’re retiring soon. Compare it to your comfort level—can you stomach a 15% drop?

2. Shift to Stability

If your plan allows, move some funds from the TDF to a stable-value fund or bond fund. These options prioritize capital preservation over growth, buffering against volatility. A 50/50 split between your TDF and a stable fund could halve the risk.

3. Delay Withdrawals

If you can, wait out the storm. Work part-time or tap other savings (like a cash reserve) to avoid selling at a loss. Time often heals market wounds—post-2022 recoveries proved that.

4. Roll Over to a Fixed Index Annuity

For those at or near retirement, consider rolling 401(k) funds into a fixed index annuity (FIA) via an IRA. Fees and illiquidity are trade-offs, but for risk-averse retirees, it’s a lifeline.

5. Consult a Pro

A financial advisor can tailor your strategy, modeling how your TDF might perform in a downturn and suggesting adjustments.

The Wake-Up Call

Target-date funds are a brilliant idea—until they’re not. Negative returns at retirement aren’t a flaw to fix; they’re a feature of their design, balancing growth and risk over decades. But in 2025’s choppy waters, that balance feels off for those crossing the finish line. A TDF isn’t a guarantee—it’s a tool, and it can fail you when you need it most.

Participants must look beyond the autopilot promise. Peek under the hood, tweak your plan, or explore options like FIAs to shore up defenses. Retirement’s too big a milestone to leave to chance—especially when the market’s reminding us, yet again, that even “safe” can stumble.

If you need help with your Financial Plan, contact us at info@legacystrong.com