Using Participant Data to Improve 401(k) Asset Allocation
The brief’s key findings are:
- Since many households fail to shift their 401(k) assets towards less risky investments as they age, target date funds do it automatically.
- Conventional target date funds rely only on the participant’s age to determine the asset allocation strategy.
- In contrast, semi-personalized target date funds add information on the participant’s earnings, 401(k) balance, and savings rate.
- Both investment strategies are better than leaving individuals on their own, but the semi-personalized approach generally outperforms the conventional approach.
- These results can be further improved by including information on the household rather than simply the individual and by accounting for earnings uncertainty.