Target-date and balanced funds: latest market offerings and risk-return analysis

This analysis looks at the latest market offerings of target-date funds (TDFs) and balanced funds (BFs) and examines their risk-return characteristics through stochastic simulations. The simulation model includes standard asset market shocks, rare economic disasters, and random labor earnings correlated with macroeconomic shocks. The data suggests that some TDFs are reducing the risky equity exposure from past levels for investors near retirement. The simulation results show that glide path designs are important determinants of wealth levels and volatilities. TDFs as the sole vehicle for retirement wealth accumulation must be considered risky, particularly when the possible occurrences of large economic disasters are considered. Nonetheless, TDFs have less risk than comparable BFs close to retirement and therefore are more suitable for investors with greater priority on wealth protection. [PUBLICATION ABSTRACT]