New Research Identifies Optimal Glide Paths—and the Disconnect with the Typical TDF

October 2021

New research combines real-world participant behaviors with academic rigor to identify optimal glide paths for plan participants—and reflects just how far the industry is from that standard. The new paper, On Optimal Allocations of Target-Date Funds , outlines optimal glide paths for different effective investor savings rates, as well as other participant characteristics and economic scenarios. What’s more, it shows the limitations with current target-date fund (TDF) glide paths, which tend to cluster around a single, high-risk equity allocation suitable only for the lowest savers.

Bridging the Gap Between Investment Managers and Academics

TDFs are the dominant investment vehicle in U.S. retirement plans today because they address multiple, complex risks over an investor’s lifetime, providing professional management and age-appropriate diversification. Practitioners originally built many of these TDFs two decades ago, determining their all-important equity glide paths using simple heuristics and unproven assumptions about investor behavior. These beliefs have influenced the industry’s approach ever since, guiding the level and slope of equity exposure over a plan participant’s working lifetime. In contrast, academic research into glide path structure has often employed overly complicated, theoretical frameworks, with little relation to the realities facing plan participants.

In this paper, we bridge the gap between the two approaches to TDF construction. We present a robust, academic-quality solution informed by actual plan participant behavior. Specifically, investor profiles in our research are based on retirement plan participant surveys and actual savings rates (defined here as the participant’s own contributions plus their employer match), among other factors. The result is a range of optimal glide paths that reflect not only an investor’s age (i.e., time they have until retirement), but also their savings behavior, risk tolerance, and other relevant aspects.

Key Takeaway #1: Participant Savings Rates are a Key Determinant of Equity Allocation Differences

Using a state-of-the-art life-cycle academic model, we find strong connections between savings rates and glide path shape over time—the higher the savings rate, the lower the optimal equity exposure should be, and vice versa.

Beyond savings rates, there are other important demographic and external factors that influence optimal glide path shape. These include participant risk tolerance; access to Social Security or pension benefits; relationship of the plan participant’s labor income to stock market movements; the prevailing interest rate environment; and the age at which participants start saving. We consider each of these scenarios and inputs and compare the resulting glide paths with current industry options.

Key Takeaway #2: Industry Average Glide Path Appears Too Aggressive for Typical Savers

The research suggests that for typical savers—those contributing 10% of their compensation (i.e., the total of their contributions plus employer match)—the “industry average” glide path has too much equity exposure after age 40. For high savers—those whose contributions total 15% of their pay—our research shows that the average glide path has too much equity exposure over the participant’s entire lifetime. Crucially, we find that the average equity glide path available today is appropriate only for the lowest savers—those whose contributions plus employer match total just 5% of their pay. 

Key Takeaway #3: Optimal Glide Paths are Flatter

Our research into the optimal glide path shape over most participant scenarios shows that de-risking (the process of decreasing the equity allocation over time, which determines the glide path slope) should occur earlier and at a steadier pace than is the practice common with many TDFs available in the industry today. The basic mechanism at work in the optimal glide path design is that of keeping the allocation to risky assets stable over time between the two primary wealth sources—financial capital and human capital (future labor income).  

Bottom line? Fiduciaries Should Review their TDF Glide Path in the Context of Participant Demographics, Savings Behavior and Employer Contributions

This analysis has important implications for plan sponsors and fiduciaries looking to ensure the “best fit” between a target-date series and their plan demographics. According to the 2013 Department of Labor “Tips for Plan Fiduciaries” memo , “TDFs may have different investment strategies, glide paths, and investment-related fees. Because these differences can significantly affect the way a TDF performs, it is important that fiduciaries understand these differences when selecting a TDF as an investment option for their plan.” We strongly believe that plan sponsors and asset managers can use these findings to improve TDF selection and design.

Insights in Action

To aid in the evaluation process, we provide plan fiduciaries and their advisors customizable tools to understand goodness of fit between their own unique plan characteristics and prevailing industry glidepaths. These tools can give investors and advisors a better understanding of the risks inherent in each TDF glide path and aid the search for suitable alternatives.


Radu Gabudean, Ph.D.,
Vice President, Senior Portfolio Manager and Head of Research, Multi-Asset Strategies,
American Century Investments

Francisco Gomes, Ph.D.,
Professor of Finance, London Business School


Alexander Michaelides, Ph.D.,
Professor of Finance, Imperial College
Business School

Yuxin Zhang, Ph.D.,
Assistant Professor of Finance, Renmin University of China


On Optimal Allocations of Target-Date Funds

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.