Lifecycle funds offered by retirement plan providers allocate aggressively to risky asset classes when the employee participants are young and gradually switch to more conservative asset classes as they grow older and approach retirement. This approach focuses on maximizing growth of the accumulation fund in the initial years and preserving its value in the later years. This paper simulates terminal wealth outcomes under conventional lifecycle asset allocation rules as well as those given by contrarian strategies that reverse the direction of the switching of assets. Our evidence suggests that the general increase in portfolio size as one approaches retirement is significant from an asset allocation perspective. Due to this portfolio size effect, we find the terminal value of accumulation in retirement account to be critically dependent on the asset allocation strategy adopted by the participant in later years (relative to earlier years). By investing conservatively in such crucial phase, lifecycle strategies recommended by financial advisors sacrifice significant growth opportunity and prove counterproductive to the participant's wealth accumulation objective. This does not seem to be compensated adequately in terms of reducing the risk of potentially adverse outcomes.2

For participants in defined contribution (DC) plans who refrain from exercising investment choice, plan contributions are invested following the default investment option of their respective plans. Since default investment options of different plans vary widely in terms of their benchmark asset allocation, the most important determinant of investment performance, participants enrolled in these options face significantly different wealth outcomes at retirement. This paper simulates the terminal wealth outcomes under different static asset allocation strategies to evaluate their relative appeal as default investment choice in DC plans. We find that strategies with moderate allocation to stocks are consistently outperformed in terms of upside potential of exceeding the participant's wealth accumulation target at retirement as well as downside risk of falling below that target outcome by very aggressive strategies whose allocation to stocks approach 100%. The risk of extremely adverse wealth outcomes for plan participants also does not appear to be very sensitive to asset allocation. Our evidence strongly suggests the appropriateness of strategies heavily tilted towards stocks to be nominated as default investment options in DC plans unless plan providers emphasize predictability of wealth outcomes over adequacy of retirement wealth.Key words: defined contribution; default option; asset allocation; retirement wealth; downside risk. 1 IN MOST DEVELOPED COUNTRIES, THE COINCIDENCE of a rapidly aging population with a rising proportion of retirees is placing considerable pressure on current social security programs. This demographic trend has resulted in the benefits from social security becoming less certain for future retirees, unless there is a sharp increase in productivity. The situation has prompted policymakers to encourage funded private retirement plans (generally sponsored by employers or other private providers) known as defined contribution (DC) plans, where employee participants build up retirement savings through mandatory or voluntary contributions in their individual retirement accounts. Retirement benefits of participants in these plans are entirely dependent on the accumulation of plan contributions and investment returns earned on those assets. A growing trend in DC plans is to give the individual participants more control over investment of their plan assets. For instance, DC plan participants are expected to select an investment option from a menu of investment choices provided by the plan sponsor. This investment decision is critical because it determines future investment returns on their plan assets, and therefore, influences the wealth accumulated in the retirement account at the end of the participant's working life.A substantial body of recent research demonstrates that although members of retirement plans have the option to exercise choice, most accept the default arrangements in the plans. The work of Choi, Laibson, Madrian, and Metrick (2003) finds that American employees tend to ac...

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