A Glide Path for Target Date Fund Annuitization

Abstract

We describe a recursive algorithm that computes the timing and quantity of purchase of deferred income annuities (DIAs) within target-date funds (TDF) in defined contribution (DC) plans, although the algorithm could also be applied within any retirement account. We map a relatively small number of statistical parameters into a rule that conveys the dollar amount of DIAs to be purchased at any given age and time. Our model is of particular relevance given the recent announcement by the U.S. Treasury Department approving the inclusion of life annuities in 401(k) plans and in TDFs in particular. Note that to qualify as a TDF requires a methodology based on “generally accepted investment theories using a consistent investment strategy.” This article offers one possible such theory in the context of DIAs.

TOPICS: Retirement, fixed income and structured finance, legal/regulatory/public policy