Exponential glide paths

In the absence of market-timing ability, investors are better-off keeping their asset allocation constant through time. Target-date funds help reduce variation in the asset allocation, by taking into account that human capital, which is a part of the investor's total portfolio and is typically considered to be bond-like, diminishes with age. To compensate, target date funds reduce the allocation to equities in the financial portfolio over time. Funds almost universally do so in a linear fashion, following straight-line glide paths. We show that linear glide paths imply two systematic deviations from constant asset allocation, and suggest a simple correction, the exponential glide path. Exponential glide paths lead to a typical increase of 5-22% in welfare relative to linear glide paths.