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Using Participant Data to Improve Target Date Fund Allocations

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  • Zhenyu Li
  • Anthony Webb
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    Abstract

    Economic theory says that participants in 401(k) plans should gradually rebalance their portfolios away from stocks and toward less risky bonds as they approach retirement. Conventional target date funds attempt to do so by automatically rebalancing the household’s portfolio periodically, but they take account of only one aspect of the individual: his expected retirement age. This paper investigates whether plan providers could improve on this “one-size-fits-all” approach by making use of information that is known to the employer, namely each employee’s income, 401(k) balance, and saving rate. Using a stochastic dynamic optimization model, incorporating both labor- and financial-market risk, it calculates the compensation a household following an optimal portfolio allocation would require for adopting three alternatives: a typical, a “one-size-fits-all,” or a “semi-personalized” portfolio allocation.

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    File URL: http://crr.bc.edu/working-papers/using-participant-data-to-improve-target-date-fund-allocations/
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    Bibliographic Info

    Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2012-20.

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    Length: 22 pages
    Date of creation: Sep 2012
    Date of revision: Sep 2012
    Handle: RePEc:crr:crrwps:wp2012-20

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