Article2018

Heterogeneity in Target Date Funds: Strategic Risk-taking or Risk Matching?

86 citations0/0 files storedReview of Financial Studies

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Financial Literacy, Pension, Retirement Analysis Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

The use of target date funds (TDFs) as default options in 401(k) plans increased sharply following the Pension Protection Act of 2006. We document large differences in the realized returns and ex ante risk profiles of TDFs with similar target retirement dates. Analyzing fund-level data, we find evidence that this heterogeneity reflects strategic risk-taking by families with low market share, especially those entering the TDF market after 2006. Analyzing plan-level data, we find little evidence that 401(k) plan sponsors consider, to any economically meaningful degree, the risk profiles of their firms when choosing among TDFs. Received June 13, 2013; editorial decision March 20, 2018 by Editor Laura Starks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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References

1971Optimum consumption and portfolio rules in a continuous-time model 1998Costly Search and Mutual Fund Flows 2001The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior 1997Risk Taking by Mutual Funds as a Response to Incentives 1995Risk Taking by Mutual Funds as a Response to Incentives 2005Consumption and Portfolio Choice over the Life Cycle 2001Naive Diversification Strategies in Defined Contribution Saving Plans 1996Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry

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