 Are lifecycle funds appropriate as default options in participant-directed retirement plans?Anup Basu, En Te Chen and Adam Clements Economics Letters, 2014, vol. 124, issue 1, 51-54 Abstract: Since the enactment of Pension Protection Act of 2006, lifecycle funds that reduce exposure to stocks with age have rapidly replaced money market funds as the most commonly nominated default investment options for participant-directed retirement plans. We examine their appropriateness in meeting a threshold level of retirement wealth required by plan participants. Using a utility function motivated by prospect theory (Kahneman and Tversky, 1979), we show that whilst lifecycle funds are vastly superior to money market funds (except for very low thresholds), they rank below balanced funds that maintain constant exposure to equities over time. As thresholds increase, lifecycle funds are also dominated by funds that switch assets conditional to prior investment performance. Even in the absence of a minimum threshold wealth level, lifecycle funds do not emerge as the most preferred choice among the investment options considered by our paper. Keywords: Default option; Lifecycle funds; Retirement wealth; Asset allocation; Prospect theory (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:124:y:2014:i:1:p:51-54 DOI: 10.1016/j.econlet.2014.04.020 Access Statistics for this article Economics Letters is currently edited by Economics Letters Editorial Office More articles in Economics Letters from Elsevier |
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