Inflation and target date funds revisited

Since pioneering the target date fund in 1993, everything we do with LifePath® has been centered around providing access to world-leading expertise on lifecycle investing. We are guided by our unique objective: Delivering consistent spending ability in retirement. 

In 2019, the LifePath Research team sought to account for the impact of inflation within our lifecycle model. Our paper, “Inflation and Target Date Funds,” considered two key questions: Is there a need for an explicit allocation to inflation hedging assets, and, if so, when should they be allocated to across the lifecycle? 

Our research found that an individual’s human capital (i.e. wages) tends to outpace inflation across virtually all interest rate and inflationary environments, regardless of income level. We also found that individuals’ financial assets—their diversified investment portfolios—tend to outpace inflation given sufficient time. 

This had meaningful impacts on how we think about inflation hedging across a lifetime. The need for allocations to assets whose chief responsibility is hedging inflation well in the short term (“inflation-hedging assets”) is less relevant the further away from retirement you are. To quantify optimal allocations to these assets, we built the industry’s first three-asset glidepath that included inflation as an explicit asset class. 

Today we seek to improve upon this work in two important ways: First, by exploring ways to systematize the precise allocation to inflation hedging assets via enhancements to our portfolio construction model. And second, by researching ways to improve the performance and diversification characteristics of our inflation hedging allocations to deliver heightened sensitivity in periods of unexpected inflation.

The pursuit of delivering consistent spending in retirement is an evolving one, as markets, policy, and demographic shifts have material impacts on retirement outcomes. The work that follows represents an evolution in our never-ending journey to help participants get to and through retirement and spend consistently throughout their retirement years.