Certified Plan Sponsor Professional (CPSP) Practice Exam

A target date fund glide path refers to?

1. The process of selecting the fund manager.

2. The timeline for rebalancing the portfolio asset allocation from most aggressive to most conservative.

3. The historical performance of the fund over time.

4. The fees associated with managing the fund.

The correct answer is: The timeline for rebalancing the portfolio asset allocation from most aggressive to most conservative.

A target date fund glide path is essentially a strategic approach to adjusting the asset allocation of investments as the target date approaches, which typically corresponds to when an investor plans to retire or access their funds. The glide path illustrates the gradual shift from a higher concentration in equities (more aggressive investments) to a greater allocation in fixed-income securities (more conservative investments) over time. This rebalancing process is crucial because it reflects a risk-adjustment strategy that aims to protect investors from market volatility as they near their target date. Early on, investors can afford to take more risks for potentially higher returns, but as the target date nears, the focus shifts to capital preservation. This progressive reallocation helps in managing risk relative to the investor's time horizon. In contrast, the other choices refer to different concepts: selecting a fund manager pertains to the choice of management style; historical performance talks about how the fund has performed over time, which does not indicate future performance; and fees associated with managing the fund focus on the costs incurred without directly addressing the asset allocation strategy inherent in the glide path.