Optimizing Target-Date Fund Rebalancing Strategies

This technical report discusses the optimization of target-date fund (TDF) rebalancing strategies, particularly focusing on threshold-based approaches. TDFs are multi-asset portfolios designed for retirement savers, balancing growth and defensive assets based on time horizons and goals. The report outlines common rebalancing methods, including monthly, quarterly, and threshold-based strategies, and proposes an optimal policy aimed at enhancing long-term investor outcomes by minimizing transaction costs while controlling allocation deviations. It highlights that the threshold-based rebalancing methodology is expected to yield higher annual returns compared to calendar-based methods due to reduced transaction costs. The report also provides a detailed analysis of the expected annual benefits of the threshold-based approach during both accumulation and decumulation phases, illustrating the advantages of daily monitoring and timely rebalancing to maintain target allocations. The findings are supported by simulations and historical data, emphasizing the effectiveness of the proposed strategies in managing risk and improving returns.