Using Participant Data to Improve Target Date Fund Allocations

Boston College Center for Retirement Research Working Paper No. 2012-20

24 Pages Posted: 19 Sep 2012

See all articles by Zhenyu Li

Zhenyu Li

affiliation not provided to SSRN

Anthony Webb

Boston College - Center for Retirement Research

Date Written: September 1, 2012

Abstract

Economic theory says that participants in 401(k) plans should gradually rebalance their portfolios away from stocks and toward less risky bonds as they approach retirement. Conventional target date funds attempt to do so by automatically rebalancing the household’s portfolio periodically, but they take account of only one aspect of the individual: his expected retirement age. This paper investigates whether plan providers could improve on this “one-size-fits-all” approach by making use of information that is known to the employer, namely each employee’s income, 401(k) balance, and saving rate. Using a stochastic dynamic optimization model, incorporating both labor- and financial-market risk, it calculates the compensation a household following an optimal portfolio allocation would require for adopting three alternatives: a typical, a “one-size-fits-all,” or a “semi-personalized” portfolio allocation.

Suggested Citation

Li, Zhenyu and Webb, Anthony, Using Participant Data to Improve Target Date Fund Allocations (September 1, 2012). Boston College Center for Retirement Research Working Paper No. 2012-20. Available at SSRN: https://ssrn.com/abstract=2149092 or http://dx.doi.org/10.2139/ssrn.2149092

Zhenyu Li (Contact Author)

affiliation not provided to SSRN ( email )

Anthony Webb

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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