Target-date funds had a rough 2022. Does that mean they’re a bad idea?

That all changed in 2022, when inflation soared and forced the Federal Reserve to up interest rates. Those rate hikes hammered bond funds, which reflect bonds’ sensitivity to interest-rate changes: When interest rates rise, they erode the price of bonds and lift yields, which move in the opposite direction. The higher rates hit stock markets as well because they ramped up borrowing costs for companies.

That left people who were feeling the pain of inflation looking for answers, says John Bovard, a certified financial planner in Cincinnati. Clients have been noticing that things are dramatically more expensive, he noted, adding: “One concern is if they’ll be able to enjoy [retirement] or have enough money saved to pay for any health-care expenses.”

One type of investment that’s a key part of saving for retirement for a large swath of Americans — including one-third of Bovard’s clients who are still working — is the target-date fund.

These funds operate on the guidance that savers should have less risk in their portfolio as they get closer to retirement, moving from higher-yielding but volatile stocks into more conservative, lower-yielding investments like bonds. The latter, in general, are thought to act as a buffer against losses, keeping the account balance stable at the same time someone takes money out during retirement.

Here’s what you need to know about target-date funds, and what recent history has taught us.

Target-date funds fall under the larger category of mutual funds or exchange-traded funds (ETFs) that are regulated by the Securities and Exchange Commission. They primarily hold a basket of stock mutual funds or stock ETFs as well as bond mutual funds and other conservative investments. These “funds of funds” have been around for close to 30 years, but it wasn’t until the early 2000s that they became popular, eventually becoming the preferred default investment option for employer-sponsored retirement plans. According to recent data from the Investment Company Institute, 68 percent of 401(k) plan participants invest in them. The option is also open to retirement savers with IRAs.

Outside of the mutual fund structure, target-date funds can also be set up as a collective-investment trusts — pooled investment accounts managed by a bank or trust company that can only be offered via a qualified employer-sponsored retirement account. They, too, hold a mix of stocks, bonds and other investments but are cheaper to operate, which enhances their appeal. However, they aren’t regulated by the SEC.

Promoted as a “set-it-and-forget” strategy, the funds take the guesswork out of investing. Instead of savers picking various stocks and bonds to create a retirement portfolio, and making changes as they wish, the target-date fund does all the work and readjusts (or “rebalances”) this mix over time. It’s a strategy that deliberately avoids the paralysis of decision-making that often seizes people when they’re presented with too many options.

Retirement savers typically pick their fund date based on what year they’ll turn 65. The younger the saver, the more heavily invested the fund is in stocks. As that investor ages, the mix shifts toward bonds to eventually mimic the “60/40 portfolio,” which refers to the ratio of stocks to bonds or other fixed income investments seen as appropriate upon retirement.

The strategy follows the ethos that younger investors can and should be willing to take on more risk because they have more time to recover from market downturns. The key is that this rebalancing is all done automatically.

The market turbulence of recent years has caused some investors and experts to give target-date funds closer scrutiny. In March, the Government Accountability Office recommended that the Labor Department update its guidance on target-date funds to employer plan sponsors — on grounds that the original language lacked details concerning collective investment trusts and other issues around funds’ structure as they relate to performance.

Less risk doesn’t prevent balances from dipping when markets go haywire, and investments once considered conservative start to wobble. For example, Vanguard’s 2025 target retirement fund — which had a 55/45 percent split at the time — lost 15.5 percent…