The effectiveness and optimal investment strategy of target date fund to deal with pension management

Target date fund is a typical occupational pension investment plan. The implication is that the proportion of wealth invested in equities (the so-called glide path) generally falls as retirement ages approach, providing an important way to deal with the population aging and economic risks of the elderly. Based on the life-cycle theory, this paper discusses the rationality and feasibility of target date fund in the process of retirement plan. The findings are as follows: First, introducing the mortality risk and salary volatility, a more realistic pension asset allocation model is established and the analytical solution of the optimal adaptive investment strategy is obtained. Second, based on the characteristics of target date fund, deterministic strategy is proposed and compared to adaptive investment strategy. It is found that the optimal stock proportions present a glide path form, and there is little difference between deterministic strategy and adaptive strategy of pension target date fund in stochastic market environment. Third, income fluctuation, pension contribution rate and investment period will significantly affect pension investment strategy; risk aversion and mortality risk will also affect investor’s investment strategy and utility.