Two Determinants of Lifecycle Investment Success

Journal of Retirement, vol. 2, no. 4, 2015 (Spring), pp. 14-21.

Posted: 1 Jun 2015 Last revised: 7 Feb 2017

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Jonathan Treussard

Research Affiliates

Vivek Viswanathan

Rayliant Global Advisors

Lillian J. Wu

Research Affiliates, LLC

Date Written: May 31, 2015

Abstract

Both investor contributions and investment returns determine retirement plan outcomes, but they have distinctive effects over the investor’s lifecycle. Focusing on target-date funds (TDFs) in 401(k) plans, our research demonstrates that in the early stage, contributions are the primary determinant of portfolio balances, whereas allocations have very little impact. In the later stage, returns — and therefore asset-allocation decisions — are the principal driver of ending portfolio values. These findings imply that defined contribution plan sponsors should encourage young workers to start contributing to their 401(k) accounts early, consistently, and at a high level. In addition, we recommend seeking TDFs that do not initially take on excessive equity risk, because a heavy loss might have lasting adverse effects on young workers’ attitudes toward investing, and equity-heavy allocations tend to have higher fees. We further suggest that plan sponsors’ asset-allocation decisions center on the years near retirement, when returns have the greatest impact.

Keywords: Investment Management, Retirement, Target Date Funds

Suggested Citation

Hsu, Jason C. and Treussard, Jonathan and Viswanathan, Vivek and Wu, Lillian J., Two Determinants of Lifecycle Investment Success (May 31, 2015). Journal of Retirement, vol. 2, no. 4, 2015 (Spring), pp. 14-21.. Available at SSRN: https://ssrn.com/abstract=2612595

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Jonathan Treussard

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Vivek Viswanathan

Rayliant Global Advisors ( email )

Hong Kong

Lillian J. Wu

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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