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Successful Defined Contribution Investment Design by Ying Gao, Stacy L. Schaus

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CHAPTER 4Target-Date Design and Approaches

 

You must unlearn what you have learned.

—Yoda

Selecting a plan’s investment default is by far the most important investment decision plan fiduciaries will make. Indeed, when a default is in place, plan participants may essentially hand over the investment decision-making reins to the plan, trusting that the selected default will help them achieve a secure retirement. If a plan participant makes no investment election, his or her contributions are typically automatically allocated typically to a qualified default investment alternative or QDIA—which might be a balanced, target-risk, or target-date asset allocation fund. Thus active decisions made by plan sponsors, including the selection of the investment default, will largely dictate, if not hardwire into place, whether workers will succeed in meeting the PRICE (refer to Chapter 2 for an in-depth discussion on PRICE) of their retirement. Since participants have only one chance to get it right—just one lifetime to build retirement savings—plan fiduciaries need to select the most appropriate default to help them succeed.

As discussed in Chapter 3, target-date funds are most prevalent and recommended among investment default alternatives. Yet there is not just one type of target-date fund or approach. Rather, there is a broad range of target-date types and structures. In this chapter, we’ll consider the selection and evaluation criteria for target-date strategies. We’ll discuss the ...

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