Target Date Funds: Marketing or Finance?

24 Pages Posted: 19 Mar 2015  

An Chen

University of Ulm

Carla Mereu

University of Ulm

Robert Stelzer

Ulm University

Date Written: March 17, 2015

Abstract

Since Target Date Funds (TDFs) became one of the default investment strategies for the 401(k) defined contribution (DC) beneficiaries, they have developed rapidly. Usually they are structured according to the principle “young people should invest more in equities”. Is this really a good recommendation for DC beneficiaries to manage their investment risk? The present paper relies on dynamic asset allocation to investigate how to optimally structure TDFs by realistically modelling the contributions made to 401(k) plans. We show that stochastic contributions can play an essential role in the determination of optimal investment strategies. Depending on the correlation of the contribution process with the market’s stock, we find that an age-increasing equity holding can be optimal too. This result highly depends on how the contribution rule is defined.

Keywords: Utility theory, Optimal asset allocation, Defined contribution, Target date fund

JEL Classification: C6

Suggested Citation

Chen, An and Mereu, Carla and Stelzer, Robert, Target Date Funds: Marketing or Finance? (March 17, 2015). Available at SSRN: https://ssrn.com/abstract=2579670 or http://dx.doi.org/10.2139/ssrn.2579670

An Chen

University of Ulm ( email )

Helmholtzstrasse 20
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Carla Mereu (Contact Author)

University of Ulm ( email )

Albert-Einstein-Alee 11
Ulm, D-89081
Germany

Robert Stelzer

Ulm University ( email )

Helmholzstrasse 18
Ulm, 89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/finmath.html

Register to save articles to
your library

Register

Paper statistics

Downloads
163
rank
169,822
Abstract Views
1,124
PlumX