Dynamic Lifecycle Strategies for Target Date Retirement Funds

Abstract

Lifecycle funds offered to retirement plan participants gradually reduce their exposure to stocks as they approach the target date of retirement. We show that such deterministic switching rules produce inferior wealth outcomes for the investor compared to strategies that dynamically alter the allocation between growth and conservative assets based on cumulative portfolio performance relative to a set target. The dynamic allocation strategies proposed in this paper exhibit almost stochastic dominance (ASD) over strategies that switch assets unidirectionally without consideration of portfolio performance.

Keywords: pension schemes, defined contribution, strategic asset allocation, lifecycle profile, stochastic simulation

JEL Classification: G11, G23