Asset Allocations and Risk-Return Tradeoffs of Target-Date Funds

This stochastic simulation analysis examines the risk characteristics of target-date funds focusing on the trade-offs between wealth creation and security. The dynamic portfolio adjustment of marketed target-date funds, with varied asset allocations, along age and various time horizons is shown. The probability distributions of account balances are produced using a vector autoregression simulation model of asset returns with the overlay of rare catastrophic financial and economic events. The risk-return tradeoffs associated with equity exposure, particularly for workers approaching retirement, underscore the importance of full disclosure, realistic assessment of risk tolerance and participant behavior, and due consideration of income strategies at and during retirement