Target-Date Funds: A State-of-the-Art Review with Policy Applications to Chile's Pension Reform

This review paper explores the evolution and implementation of target-date funds (TDFs), specifically focusing on their application within the context of Chile's 2025 pension reform. The introduction of TDFs marks a significant shift in Chile's pension system, which has traditionally relied on a multifund structure (essentially a target-risk funds system). We offer a comprehensive review of the theoretical foundations and practical considerations of TDFs, highlighting key challenges and opportunities for Chilean regulators and fund managers. Notably, we recommend that the glide path design should be dynamic, incorporating adjustments based on total accumulated wealth, with particular flexibility depending on each investor's risk tolerance. Furthermore, we propose that the new benchmark for generational funds should feature a wide deviation band relative to the new benchmark portfolio, which could foster a market with more investment strategies and better competition among fund managers, encourage the inclusion of alternative assets, and foster greater diversification. Lastly, we highlight the need for future work to define a glide path model that incorporates the theoretical frameworks described, tailored to the unique parameters of the Chilean pension system. These recommendations aim to optimize the long-term retirement outcomes for Chilean workers under the new pension structure.