Real Asset Allocations in Target-Date Funds

Real asset allocations are important for select plan participants.

Target-date fund managers can consider exposures to real estate and commodities to protect participants’ retirement assets.

Market volatility and rising inflation can erode retirement plan participants’ purchasing power, and these factors suggest that defined contribution plan sponsors should consider allocations in real assets, says Jeremy Stempien, portfolio manager and strategist at PGIM DC Solutions.

“The biggest risk for retirees, whether it is somebody retiring today or somebody who has been retired, is their ability to protect or preserve their purchasing power,” Stempien says.   

While many TDF suites have exposure to Treasury inflation-protected securities, few have sufficient allocation to commodities and real estate, according to PGIM. Stempien explains that the biggest risk from rising inflation is for participants who are near retirement or in retirement and who will need to draw income from their DC plan.

“Inflation for retirees has actually been higher than the headline inflation that we hear about in the news and read about every day,” Stempien says. “The basket of goods and services that retirees tend to purchase has historically had a little bit of a higher inflation rate than the headline inflation figures.”

With inflation muted over the last two decades, rising prices have not been a huge risk. That has changed in 2022.

“We have seen such an enormous pick up in inflation over the past few months that it is a major threat for retirees looking to draw down income,” Stempien explains. “In response, we have built into our portfolio a number of tilts towards asset classes that have a high correlation or have a hedge towards inflation.”

The Prudential Day One TDF suite incorporates TIPS, commodities and private real estate. In combination, the exposures have helped protect investors, Stempien adds.

Morningstar data incorporated into research from PGIM show that non-traditional assets have outperformed equities and fixed income in high-inflation periods. The average return for real estate is 12.45%, while commodities return 11.19% and TIPS return 9.24%. Comparatively, bonds return 6.34% and stocks deliver 3.64%, according to the research.