Using a Life Cycle Model to Design a Target Date Glidepath

Abstract

Few practitioners use life cycle models for the actual design and management of target date funds. The authors argue that life cycle models should be applied in this context and, conversely, that life cycle model development can and should be informed by questions and challenges arising from target date fund design and management. They evaluate a real-world use case by examining the development of a new life cycle model to serve an existing set of target date funds. In a positive feedback loop, questions arising from a review of the current glidepath design informed construction of the life cycle model and, in turn, the model generated both qualitative and quantitative results that informed the glidepath review. Specifically, the authors show how the model was used to determine the appropriate degree of stock–bond allocation flexibility at each stage along the glidepath.