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Article

Evaluation of Target-Date Glide Paths within
Defined Contribution Plans

Richard K. Fullmer and James A. Tzitzouris
The Journal of Retirement Spring 2014, 1 (4) 75-94; DOI: https://doi.org/10.3905/jor.2014.1.4.075
Richard K. Fullmer
is an asset allocation strategist and vice president of T. Rowe Price Group in Baltimore, MD.
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  • For correspondence: richard_fullmer@troweprice.com
James A. Tzitzouris
is the associate director of asset allocation research and vice president of T. Rowe Price Group in Baltimore, MD.
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  • For correspondence: jim_tzitzouris@troweprice.com
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Abstract

In this article, the authors present a methodology to support sponsors of defined-contribution (DC) plans when evaluating the allocation to equity over a target-date fund’s glide path. When evaluating glide paths, sponsors must pay heed to two primary goals: The first is to generate lifetime income consistently over the course of retirement; the second is to limit the risk of capital loss near and during retirement, which is particularly important for participants who withdraw balances over short horizons. The challenge of glide path selection is striking a compromise between these competing goals. This compromise cannot be achieved via objective analysis alone and must also be informed by the subjective horizon and risk preferences of the sponsor acting as agent for the plan participants. The authors find that higher-equity glide paths offer greater efficacy for lifetime income replacement, while lower-equity glide paths offer greater efficacy for stable account balances with lower risk of capital losses. These conclusions hold over a wide range of plan characteristics and assumptions, although the relative magnitude of the trade-off depends on characteristics unique to each plan.

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The Journal of Retirement: 1 (4)
The Journal of Retirement
Vol. 1, Issue 4
Spring 2014
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Evaluation of Target-Date Glide Paths within
Defined Contribution Plans
Richard K. Fullmer, James A. Tzitzouris
The Journal of Retirement Apr 2014, 1 (4) 75-94; DOI: 10.3905/jor.2014.1.4.075

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Evaluation of Target-Date Glide Paths within
Defined Contribution Plans
Richard K. Fullmer, James A. Tzitzouris
The Journal of Retirement Apr 2014, 1 (4) 75-94; DOI: 10.3905/jor.2014.1.4.075
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  • Article
    • Abstract
    • GLIDE PATH DESIGN
    • QUANTIFYING PLAN GOALS
    • EVALUATING THE TRADE-OFFS
    • SENSITIVITY OF FINDINGS TO PARTICIPANT CHARACTERISTICS
    • CONCLUSIONS
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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