Making A Complex Investment Problem Simple: Robo Target Date Funds

Document Type

Article

Publication Date

4-10-2018

Abstract

Investing is a complicated affair, particularly for people with low financial literacy. Target-date funds are designed to make investing easy for pension participants. To simplify the employee's decision, many defined contribution plans offer employees a target-date fund based on only one piece of data--the employee's expected retirement date. The employee may be placed in a target-date fund as the default plan if the employee does not make an active choice. Target-date funds' one-size-fits-all approach generally does not provide the appropriate level of risk for all employees who plan to retire in a given year. The authors address that issue in this article. Their proposal has three parts. First, they propose that target-date funds should allow greater personalization of investments by offering participants a conservative, moderate, and risky fund for each target-date. While pension participants currently have the option of choosing a more or less risky target-date fund by choosing a later or earlier target-date than their actual retirement date, many pension participants lack the sophistication to take advantage of that option. Second, they suggest that pension plans incorporate robo advisers to help participants identify the appropriate level of risk and appropriate target-date fund based on their personal circumstances. Third, they propose on-the-spot financial education, to be provided when a participant is selecting a target-date fund, to help participants understand the implications of risk level and target-date fund choice for both pension growth and the range of possible outcomes.

Keywords

Lifecycle funds, retirement plans, pension plans, employers, equity, portfolio management, stock exchanges

Publication Title

The Journal of Retirement

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