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Target-date funds are now fast approaching $1 trillion in assets, with the help of massive 401(k) contributions, but participants who think the funds will meet their retirement income needs could be sorely disappointed, according to Robert Arnott, chairman of Research Affiliates.

The funds are loaded up with inflexible allocations to stocks and bonds—the very assets expected to deliver some of the lowest returns in the coming decade, according to Arnott,  an outspoken critic of the funds who opened Thurdsay’s session of the Sixth Annual Retirement Symposium in Las Vegas, an event sponsored by Financial Advisor and Private Wealth magazines.

Research Affiliates estimates that U.S. stocks’ real return over the next 10 years will be just 1 percent, and the aggregate U.S. bond index will return nothing. 

Those types of skimpy yields “crumble with inflation,” leaving savers short of their retirement needs, Arnott said.

Making matters worse, “right now target date funds are shifting relentlessly into bonds—oh my goodness!” he said.

Arnott, a proponent of fundamentally weighted indexes, took particular aim at broad-based bond indexes.

The allocation in a capitalization-weighted bond portfolio “depends on the appetites of the borrower,” he said. “The more money they want, the more you lend. Even [Vanguard founder] Jack Bogle has questioned that logic.”

Investors need to diversify into assets that correlate better with inflation, such as commodities, bank loans, high-yield bonds, convertibles, REITs and emerging markets bonds and stocks, Arnott said, a combination he calls the  “third pillar” to complement traditional stocks and bonds.

It’s a mix of assets he uses in subadvising the Pimco All Asset funds—and a mix that has not worked well in the past few years.