On Optimal Allocations of Target-Date Funds

Journal of Retirement (forthcoming)

Posted: 8 Jun 2021 Last revised: 25 Apr 2022

See all articles by Radu Gabudean

Radu Gabudean

American Century Investments

Francisco Gomes

London Business School

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Yuxin Zhang

Renmin University of China

Date Written: May 30, 2021

Abstract

We study optimal life-cycle portfolio allocation and its application to target-date fund (TDF) design. We show that optimal TDF allocation must be explicitly linked to a savings rate; for example, a higher savings rate generating higher financial wealth accumulation should necessarily come with a more conservative TDF. Further, we quantify the extent to which accumulated wealth, the investing environment, and participant characteristics affect TDF allocations and compare the resulting optimal allocations against the observed universe of U.S. TDF products. Plan sponsors and asset managers can use these findings to improve TDF selection and design.

Keywords: Target Date Funds, Life cycle investing, Saving for retirement, Glide path

JEL Classification: G11, G50

Suggested Citation

Gabudean, Radu and Gomes, Francisco and Michaelides, Alexander and Zhang, Yuxin, On Optimal Allocations of Target-Date Funds (May 30, 2021). Journal of Retirement (forthcoming), Available at SSRN: https://ssrn.com/abstract=3858344 or http://dx.doi.org/10.2139/ssrn.3858344

Radu Gabudean (Contact Author)

American Century Investments ( email )

1665 Charleston Road
Mountain View, CA 94043
United States

Francisco Gomes

London Business School ( email )

Finance Department
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/view/francisco-gomes/home

Alexander Michaelides

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuxin Zhang

Renmin University of China ( email )

Renmin University of China
Haidian District
Beijing, Beijing 100872
China

HOME PAGE: http://https://sites.google.com/view/yuxin-zhang/home

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