How do fund companies design target date funds?
In designing target date funds, providers may consider historical information about the markets and the behavior of retirement investors for whom the fund is designed, including the provider’s assessment of investors’ wealth accumulation, savings behavior, risk tolerance, and spending patterns in retirement. Fund providers may also consider various risks that investors may face, including market risk, inflation risk, and longevity risk (i.e., risk of outliving one’s assets). Based on these considerations, fund providers typically develop a model using modern portfolio theory, including the principles of diversification and asset allocation, and test the model through extensive simulations over various market conditions. Providers may periodically review the assumptions and historical information underlying their target date funds and may make adjustments over time. Some providers also actively adjust asset allocation along the glide path within the preset limits to take into account ma
