On Optimal Allocations of Target-Date Funds
Journal of Retirement (forthcoming)
Posted: 8 Jun 2021 Last revised: 25 Apr 2022
Date Written: May 30, 2021
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: Suggested Citation