Life After Full-time Work Blog

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#81 Target Date Funds And How To Improve Them

A glide path that is based on assumptions about the average saver is a great start as a default option. That doesn’t mean it can’t be improved. This post describes ways in which it can be customized to better fit each saver’s characteristics.


In Post #78 [] we saw that a glide path makes sense in accumulation, meaning that the investment of savings for retirement should start with a high growth exposure, which in turn should decline as you approach retirement. The reason is actually that a constant allocation to growth makes sense, when you add together the sum of invested financial assets and future human capital; but if one considers future human capital as a non-growth asset, then the accumulated financial assets themselves should have a declining growth exposure.

Declining from what initial level? Start declining after how long? At what pace? The glide path concept gives no answer to these questions. It simply says that a decline makes sense. In fact, when it comes right down to it, the glide path notion makes only one claim: that it’s superior to a level growth exposure for accumulated assets throughout the accumulation period. (And this can be proved mathematically.)


Not surprisingly, the investment industry found a simple way to implement the idea. What else in a saver’s life changes over time? The saver’s age, of course. So, if we can find a target date for retirement, we can construct a schedule of growth exposures that decline with age as the retirement target date approaches. Make some reasonable assumptions about the saver’s goals and risk tolerance and probable contributions throughout the working years, and it’s then possible to calculate the glide path precisely.

This became known as the target date approach. Everyone with the same target date goes into a fund (called, naturally, a target date fund: for example, the 2035 fund for those planning to retire in 2035) and the growth exposure in the fund is automatically adjusted downward every year.

Of course, the devil is in the details. And anyone who dislikes any one of the details in any one approach seems today tempted to condemn the entire approach. And so it seems to have become the norm to attribute increasingly exaggerated shortcomings to target date funds.


Let me mention some ways in which today’s state of the art can be improved. In fact, there are really only three broad categories of improvement.

  • Customize the glide path. Remember those assumptions I mentioned? Whenever possible, don’t use generic assumptions: customize them for the individual saver. HR departments know much more than a worker’s age. They know the current pay, the pay history (making it easier to project the Pillar 1 pension that the pension pot will supplement), whether there’s an existing defined benefit entitlement, whether the worker has committed to increasing future contributions. All these can easily be taken into account to create a customized glide path. Asking specific questions can improve the customization: when do you hope to retire, do you have an income replacement goal, and so on.

Recent research [1] suggests that, if a glide path isn’t actually customized to a worker’s specifics, there ought to be a few glide paths available to choose from. The most important factor that defines a glide path isn’t so much the slope of the glide path as its overall allocation to growth exposures. Intuitively this makes sense: the glide path is itself attempting to maintain a constant allocation to growth exposures, taking future human capital into account; and therefore offering a few levels of those growth exposures to choose from is sensible (representing high, medium and low average exposures). That research also observes that Denmark seems to be the only major country where such a choice is typically offered.


  • Recalibrate the glide path periodically (for example, annually). It’s based on investment return assumptions, and of course life always deviates from the assumptions. So too does the pay scale. It’s also possible that the worker’s goals or risk tolerance may have changed. Recalculating the glide path to take account of these changes is not a big mathematical problem. Adapting the path to changing circumstances is always superior to a “set it and forget it” approach.


  • Implement it inexpensively. Investment charges are notoriously high. Studies invariably show that higher charges are not correlated with higher returns. Perhaps, then, take the certain improvement of outcome that comes from low fees, in preference to the uncertain hope of superior performance. (See Posts #37 –#40 for discussions of the active/passive issue.)


Those are improvements that are feasible, without in any way contradicting the superiority of glide paths over constant allocations. But critics sometimes attack the entire notion rather than a specific aspect of it.

It’s perfectly legitimate to attack employers who buy a target date approach from an investment vendor without understanding the underlying assumptions or whether they fit the workforce. That’s irresponsible. But critics don’t stop there.

Suppose, as a critic, that you don’t like high-fee funds. Then say so, explicitly. Don’t condemn the entire target date approach. High-fee funds are not a necessary part of the concept. They also occur with overwhelming frequency in programs that don’t offer target date funds. Bringing in target date funds would actually be an improvement. Of course, using low-fee funds would create a second level of improvement. But condemning the target date concept itself as the product of “some kind of marketing genius” because “all you’re getting is that glide path, a gradually declining allocation to the stock market,” and meanwhile savers “are getting ripped off” [2] is (to say the least) misdirected.

Another exaggerated criticism had a different purpose, I’m told. Believing that some of the money forced into Australian superannuation by the (relatively) high contribution rate might better be directed towards supporting a home purchase (which would also have an impact on the person’s post-retirement asset means test – yes, these considerations are often complex and interactive), the critic at a forum went much further, resulting in the following news report: “[T]arget date funds were roundly criticized by academics” [3] as being “not a good idea” because all they provide is “time diversification” (nice phrase, and accurate) but “they do not seem to achieve any worthwhile purpose.” Of course this has nothing to do with target date funds.

I’ve written myself about the emotional and financial appeal of owning your own home (, but that shouldn’t make the target date approach the whipping boy.

[Note: I amended this post on August 4, 2019, removing the sarcastic tone I used against the reported academic critique, in response to a thoughtful reader who was present at the forum and wrote to me privately to give me much more detailed background about the event. I maintain nevertheless that the criticism was misdirected, and should have been directed at superannuation itself rather than (as reported) the target date detail. And this post is entirely about the target date detail.]



A typical glide path can be improved by customizing it to the investor’s circumstances and goals, recalibrating it periodically, and focusing on inexpensive investments.


[1] Khemka, Gaurav and Mogens Steffenson and Geoffrey J. Warren (2019). “How sub-optimal are age-based life-cycle investment products?” Available at SSRN: or

[2] Baldwin, William (2013). “The trouble with target date funds” in Forbes (June 24, 2013).

[3] Bright, Greg (2016). “Research disses target-dates, backs super mortgage withdrawals” in Investor News Strategy (Australia) (April 17, 2016).


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

2 Responses to “#81 Target Date Funds And How To Improve Them”

  1. Cindy Deere says:

    I’m actually a fan of intelligent use of target date funds. I may be simplistic in my thinking, but sometimes it seems like we make investing way too complex for the average investor. Anyway, I think the plan fiduciaries need to be intelligent in determining which funds and glide paths (and at what cost) the plan will include; and the investor needs to be intelligent in understanding what the specific glide path offers and how that may or may not fit his/her needs. For many people, I suspect a single target date fund is a great option and for others, they may wish to customize their use of these funds (perhaps by selecting more than one fund) to get a glide path that suits them; unless, of course, customized target date funds are available to them in their plan.

    • Don Ezra says:

      Thanks, Cindy. I agree completely. In fact, you’ve expressed this better and more succinctly than I did!

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