Target-Date Funds, Glidepaths, and Risk Aversion
14 Pages Posted: 14 May 2020
Date Written: April 19, 2020
Target-date funds feature asset allocations that become increasingly conservative as investors approach retirement. An important shortcoming of this strategy is that it is suboptimal in terms of capital accumulation, which begs the question of why these funds are so popular. A possible answer is that investors become more risk averse as they age, gradually favoring more downside protection as they approach retirement. The main issue explored in this article is how much more risk averse would investors need to become during their working years to select asset allocations similar to those in target-date funds; the evidence here shows that investors would have to roughly double their risk aversion during the last 25 years of their working period. An intuitive interpretation of this result, based on how much an individual would pay to avoid a gamble, is also discussed.
Keywords: target-date funds, glidepath, asset allocation, risk aversion
JEL Classification: G11
Suggested Citation: Suggested Citation