Asset Allocation: Glide Path Design for Target Date Retirement Funds

ABSTRACT Target date funds (TDFs) are becoming increasingly popular investment choices among investors with long-term prospects. Examples include members of superannuation funds seeking to save for retirement at a given age. TDFs provide efficient risk exposures to a diversified range of asset classes that dynamically match the risk profile of the investment payoff as the investors age. This is often achieved by making increasingly conservative asset allocations over time as the retirement date approaches. Such dynamically evolving allocation strategies for TDFs are often referred to as glide paths. We propose a systematic approach to the design of optimal TDF glide paths implied by retirement dates and risk preferences and construct the corresponding dynamic asset allocation strategy that delivers the optimal payoffs at minimal costs. The TDF strategies we propose are dynamic portfolios consisting of units of the growth-optimal portfolio (GP) and the risk-free asset. Here, the GP is often approximated by a well-diversified index of multiple risky assets. We backtest the TDF strategies with the historical returns of the S&P500 total return index serving as the GP approximation.

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Liabilities Matter: Improving Target Date Glidepath Construction through Liability Adaptive Asset Allocation

The Journal of Retirement ◽

10.3905/jor.2019.7.1.044 ◽

2019 ◽

Vol 7 (1) ◽

pp. 44-57 ◽

Cited By ~ 1

Author(s):

Michael W. Crook

Keyword(s):

Asset Allocation ◽

Target Date

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The quantification of type-2 prudence in asset allocation by the trustees of a retirement fund

Annals of Actuarial Science ◽

10.1017/s1748499516000026 ◽

2016 ◽

Vol 10 (2) ◽

pp. 169-202

Author(s):

Robert J. Thomson ◽

Taryn L. Reddy

Keyword(s):

Risk Aversion ◽

Asset Allocation ◽

Weighted Average ◽

Expected Utility Theory ◽

Model Parameters ◽

Defined Benefit ◽

Defined Contribution ◽

New Class ◽

Retirement Funds

AbstractIn this paper, consideration is given to the normative use of expected-utility theory for the purposes of asset allocation by the trustees of retirement funds. A distinction is drawn between “type-1 prudence”, which relates to deliberate conservatism on the part of actuaries in the setting of assumptions and the determination of model parameters, and “type-2 prudence”, which relates to the risk aversion of the trustees. The intention of the research was to quantify type-2 prudence for the purposes of asset allocation, both for defined-contribution (DC) and defined-benefit (DB) funds. The authors propose new definitions of the objective variables used as the argument of the utility function: one for DC funds and another for DB funds. A new class of utility functions, referred to as the “weighted average relative risk aversion” class is proposed. Practicalities of implementation are discussed. Illustrative results of the application of the method are presented, and it is shown that the proposed approach resolves the paradox of counter-intuitive results found in the literature regarding the sensitivity of the optimal asset allocation to the funding level of a DB fund.

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