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Employees are commonly defaulted into either a homogeneous passive investment such as a target‐date fund, or into a managed account that offers personalization and access to an advisor. Higher performance among investors in target‐date funds suggests a possible behavioral benefit of a passive default that requires no active monitoring by investors. Access to a human advisor and an asset allocation matched to employee risk preferences can also help investors avoid trading after a market decline. This paper explores the relationship between trading activity and advice‐seeking behavior among 5 million US DC participants during the COVID‐19 pandemic, comparing self‐directors and target‐date fund investors to those using managed accounts service. We find participants who use target‐date funds are less likely to phone during a market crash. Participants in managed accounts are the least likely to trade after seeking advice. These findings are consistent with the hypothesis that passive default can improve outcomes where active choice can harm outcomes, and personalized defaults with access to advice can help participants avoid investment mistakes. [ABSTRACT FROM AUTHOR]

Target Date Funds (TDFs) are portfolios with a pre-defined end date, the so-called "target date," and the essential attribute that they reduce their allocation to stocks with the passage of time. The proposition upon which TDFs are both sold and bought is that investors benefit from the consistent reduction in portfolio risk as investors progress toward the end of their applicable investment time horizon. The manufacturers of TDFs have a clear and unambiguous motivation to develop an appealing story and associated product that encapsulates said story, so as to grow their assets under management. The pension plan sponsor's motivation is to provide investment options that protect it from regulatory and litigation risk. Unfortunately, the data offer a different reality. The data support the conclusion that investors are harmed by the use of TDFs when sufficient time diversification is present, resulting from a sufficient number of relatively equal-sized contributions and/or withdrawals evenly dispersed over time. Specifically, the analysis shows that: 1) the use of precious metals remains unattractive for investment time periods of 12.5 years and longer, 2) optimal starting allocations of 100% stocks remain preferable for investment time periods of 5 years and longer, and 3) the use of TDFs remains significantly harmful to investors' wellbeing for periods of 15 years and longer. The causality driving these results is both simple and straightforward. First, bonds and precious metals impose a severe return penalty on the investor. The geometric mean returns are -72% and -87% proportionately lower than for stocks, respectively. Second, bonds and precious metals impose extended (many decade-long) episodic eras of negative returns, unlike stocks. Third, time diversification applicable to circumstances where contributions and/or withdrawals of relatively equal size occur over extended time periods and with high frequency make the use of bonds, precious metals, and TDFs purely redundant and non-contributive. [ABSTRACT FROM AUTHOR]

Target date funds (TDFs) are designed to provide unsophisticated or inattentive investors with age‐appropriate exposures to different asset classes like stocks and bonds. The rise of TDFs has moved a significant share of retirement investors into macrocontrarian strategies that sell stocks after relatively good stock market performance. This rebalancing drives contrarian flows across equity mutual funds held by TDFs, stabilizing their funding, and reduces stock returns for stocks disproportionately held by these funds when stock market returns are relatively high. Continued growth in TDFs and similar investment products may dampen stock market volatility and increase the transmission of shocks across asset classes. [ABSTRACT FROM AUTHOR]

Using a sample of individuals who hold target retirement funds (TRFs), we examine how people use arithmetic to estimate their retirement age. We find a robust "zero" bias where investors have a strong preference for TRFs that end with zero compared to TRFs that end with five. The evidence is consistent that the bias is an outcome of people using imprecise arithmetic, specifically rounding up and down in the computational estimation required to estimate their retirement year. The zero bias manifests itself in people born in years ending between eight and two. Those born in zero- through two-ending years select TRFs that imply they intend to retire at 70, whereas those born in eight- and nine-ending years choose TRFs that imply retiring at 60. The choices can significantly lower or increase wealth by altering the contribution amounts and exposing investors to risk incompatible with their age profile. The bias is particularly costly for those who are risk averse and select later TRFs but is also most beneficial to risk-averse consumers who choose early TRFs. We experimentally confirm that the contribution rates are related to the TRF choices and that the use of imprecise mathematical rounding is implicated in the bias. [ABSTRACT FROM AUTHOR]

The use of target date funds (TDFs) as default options in 401(k) plans increased sharply following the Pension Protection Act of 2006. We document large differences in the realized returns and ex ante risk profiles of TDFs with similar target retirement dates. Analyzing fund-level data, we find evidence that this heterogeneity reflects strategic risk-taking by families with low market share, especially those entering the TDF market after 2006. Analyzing plan-level data, we find little evidence that 401(k) plan sponsors consider, to any economically meaningful degree, the risk profiles of their firms when choosing among TDFs. Received June 13, 2013; editorial decision March 20, 2018 by Editor Laura Starks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

Target-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Inclusion of these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target-date funds may enhance retirement wealth by as much as 50% over a 30-year horizon. [ABSTRACT FROM AUTHOR]

We solve for optimal consumption and portfolio choice in a life-cycle model with short-sales and borrowing constraints; undiversifiable labor income risk; and a predictable, time-varying, equity premium and show that the investor pursues aggressive market timing strategies. Importantly, in the presence of stock market predictability, the model suggests that the conventional financial advice of reducing stock market exposure as retirement approaches is correct on average, but ignoring changing market information can lead to substantial welfare losses. Therefore, enhanced target-date funds (ETDFs) that condition on expected equity premia increase welfare relative to target-date funds (TDFs). Out-of-sample analysis supports these conclusions. [ABSTRACT FROM PUBLISHER]

The Financial Planning Review celebrates the 50th anniversary of financial planning with events like the Diversity Summit and a gala celebration. This issue focuses on peer-reviewed research related to the practice of financial planning. One study examines investor behavior during the COVID-19 pandemic and finds that financial advice can moderate rash investment decisions. Another study explores the factors associated with seeking financial advice, revealing differences between Black and White households. Additionally, research suggests that autonomous motivation plays a significant role in advisor happiness and their inclination to change firms or leave the industry. Lastly, the article discusses the importance of incorporating worldviews into financial planning to align goals with clients' values. Overall, these articles highlight the value and holistic nature of financial planning. [Extracted from the article]

The authors present a simple, two-period model of human capital accumulation on the job and through college attainment. They use a calibrated version of the model to explain the observed flattening of the life-cycle earnings profiles of two cohorts of workers. The model accounts for more than 55 percent of the observed flattening for high school-educated and for college-educated workers. Two channels generate the flattening in the model: selection (or higher college attainment) and a higher skill price for the more recent cohort. Absent selection, the model would have accounted for no flattening for high school-educated workers and about 23 percent of the observed flattening for college-educated workers. [ABSTRACT FROM AUTHOR]

There is a vast literature which shows that investors don't make rational decisions in allocating resources among different investments. Target risk funds and target date funds are two types of mutual funds primarily organised as fund of funds that make the asset allocation decision for an investor. Both are used as options in 401(k) plans and Individual Retirement Accounts. However they control for risk in very different ways. Target risk funds have not been studied. This article is the first comprehensive study of their characteristics and performance and how they compare to target date funds as an investment. [ABSTRACT FROM AUTHOR]

The article discusses the shortcomings of the life-cycle funds or target-date funds, which have been one of the fastest-growing areas among defined contribution plans. Life-cycle funds suffer from the under-utilization of global investment opportunities in stock and bond markets as well as a lack of inflation-protection assets. Like many traditional portfolios, life-cycle funds have excessive concentration in one risk source, which is, the stock market.

The article discusses the significance of the target-date fund investment strategy of plan sponsors under qualified automatic contribution arrangement. Topics covered include the relevance of investment returns and contribution rates in retirement income, plan demographics based on compensation and tenure, voluntary and automatic enrollment under employee and employer contributions, and various exhibits depicting income for different plan groups.

An introduction to the journal is presented which discusses topics within the issue including topics on scheduled distributions for individuals under a target-date fund, the evaluation of qualified automatic contribution arrangements and the significance of downside hedging.

The article offers information on selecting a target date glide path or the strategic asset allocation of a target date strategy. Topics discussed include key active decisions involved in assessing a glide path, factors that should be considered by plan sponsors when evaluating their retirement plan lineup, and the importance of adding 25 basis points, five per year, to a target date strategy's performance.

To evaluate the efficiency of target-date funds (TDFs), one of the fastest growing lines of mutual funds, we take 36 TDF series offered in the market and calculate investors' welfare loss from TDF investment. We divide welfare loss into two categories: loss from suboptimal risky portfolio and loss from inappropriate glide path. We find that inappropriate glide path constitutes the major source of TDF performance inefficiency. This inefficiency could reduce an investor's annual consumption by up to 17 per cent. We also find that the substantial heterogeneity in TDF performance is primarily caused by variation in glide paths. The heterogeneity contradicts the notion that one TDF fits everyone and it confirms the urgency to match TDF selection to investors' risk profiles. In this spirit, we advocate a risk-based selection strategy as a remedy for TDF inefficiency. We estimate that this strategy could reduce approximately half of the welfare loss suffered from other commonly used strategies. [ABSTRACT FROM AUTHOR]

Target-date funds have become a core product for investors who are saving for retirement. These funds periodically reduce their allocations to stocks and increase their allocations to bonds and cash, becoming more conservative as retirement approaches. This lifecycle strategy implies that investors are aggressive with little capital and conservative with much more capital, which may be suboptimal in terms of wealth accumulation. This article evaluates three alternative types of strategies, including contrarian strategies that follow a glidepath opposite that of target-date funds; that is, they become more aggressive as retirement approaches. The results from a comprehensive sample that spans more than 19 countries, two regions, and 110 years suggest that, relative to lifecycle strategies, the alternative strategies considered here provide investors with higher upside potential, more limited downside potential, and higher uncertainty--although that uncertainty is largely limited to how much higher their terminal wealth is expected to grow with these strategies. [ABSTRACT FROM AUTHOR]

The article offers information on the development of target-date fund (TDF) assets among investors that focus on retirement payouts. It offers information on the rebalance of stock and bond and risk profile in stocks and bonds as an investor. It offers information on beta strategies for cap-weighted indices and low-volatility strategies as the investor approaches retirement.