Abstract
We show that saving for retirement in target date funds (TDFs) modi.ed to take advantage of predictability in excess returns driven by the variance risk premium generates economically large welfare gains. We call these funds tactical target date funds (TTDFs).
To be easily implementable and communicated to investors, the portfolio rule followed by TTDFs is designed to be extremely simplified relative to the optimal policy rules. Despite this significant mis-specification, the significant welfare gains persist. Crucially, these gains remain economically important even after we introduce turnover restrictions that limit the annual turnover of TTDFs to be comparable to that of the average mutual fund, and after we take into account for potential increases in transaction costs. Finally we show that this predictability does not appear to be correlated with household risk.