TARGET DATE FUNDS

Reducing risk

Jan 1, 2016
By BlackRock

While target date funds behave in broadly similar ways by reducing risk throughout a working career, there are significant differences between funds.

Performance is often looked to as a major differentiator, but 1, 3 and 5-year return snapshots cover only a fraction of the time a participant may be invested in target date fund. What’s more, performance numbers may mask considerable volatility. In this paper we review evidence that volatility may negatively affect participant behavior and consider whether a target date fund managed to reduce downside volatility may do a better job keeping participants invested so they can better benefit from a market rebound. Finally, we review the four risks that we believe target date funds need to manage, including market, longevity, inflation and behavioral.

 


For the full analysis, read on.