Retirement Plan Update, Q3 2022

Market Recap:

The third quarter of 2022 started with a rally in stocks, as markets hoped that inflation had peaked, and the Fed would slow down or pause interest rate hikes.  Unfortunately, the rally ran out of steam in August when data indicated that inflation was still problematic, and investors concluded the Fed would continue increasing interest rates. 

It's an interesting time as low unemployment, rising wages and higher consumer spending are generally all good for the economy.  Unfortunately, right now, good news is bad news as those factors drive strong consumer spending which then leads to persistently high inflation.  The Fed continues to state they will fight inflation “until the job is done.” Monetary policy is difficult because changes take time to ripple through the economy and bankers have usually gone too far in tightening by the time the data reflects the desired trend.  Often that leads to a general slowdown in the economy, and we have a recession.  A recession is usually tough on stocks and good for bond prices, but this year has been difficult for almost all assets due to rising interest rates.  There’s no silver bullet right now, but we know historically markets revert back to their normal cycles.  Retirement plan participants with a long-term focus and consistent investment will eventually be rewarded for their patience.

Target Date Funds Explained

Target date funds are a key component in good retirement plans.  These funds offer participants the ability to invest in age-appropriate asset allocations without the participant having to figure out an asset allocation mix or pick all the funds.  The fund manager of a target date fund is managing the asset allocation mix of the fund to be appropriate for someone retiring at the targeted date.  Retirement dates 20-30 years in the future will be much heavier in stocks and growth assets, which have better returns over long periods of time.  As participants approach retirement, the target date fund manager is reducing riskier asset exposure and adding fixed income elements to the fund.  These funds allow participants an option to truly set it and forget it and know that the fund manager has you covered.  It’s important to note, though, that these funds do not adjust asset allocation mix for changes in market conditions, or anticipation of recession.  As we’ve noted previously, volatile markets like we’ve experienced in 2022 create buying opportunities for regular investors dollar cost averaging into the market each pay period.

As always, if you have questions or concerns, please reach out to your plan’s advisor!