Modern portfolio theory needs to be used when creating equity glide paths for target-date funds, according to a report from Ibbotson Associates. Additionally, real return asset classes such as commodities and real estate should play an increasing role in the construction of glide paths, according to the paper, “Lifetime Asset Allocations: Methodologies for Target Maturity Funds.”
During the accumulation phase, expense, savings, mortality and market are the primary risks for participants. During the retirement phase, the primary risks are expense, longevity and market. According to Ibbotson’s report, an investor’s glide path should be customized based on these dimensions.
