Heterogeneity in Target-Date Funds and the Pension Protection Act of 2006

Abstract:     
This paper studies the evolution of the market for target-date funds (TDFs) between 1994 and 2009. We document pronounced heterogeneity in the TDF universe: TDFs with the same target date have delivered very different returns because of differences in systematic risk in the stock allocations, and because of differences in the stock versus bond allocations. This heterogeneity has increased over time, especially after the passage of the Pension Protection Plan of 2006. Indeed, we can attribute the increased heterogeneity in TDFs to the entry of new fund families in the TDF market between 2007 and 2009. These developments in the TDF market are consistent with new entries in the market adopting a product-differentiation strategy. Our findings suggest that the widespread adoption of TDFs will not result in returns that are similar across investors enrolled in different 401(k) plans, and that the current proposals for further disclosure in TDF offerings may have little impact on the incentive for fund families to offer similar risk profiles.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Number of Pages in PDF File: 40

working papers series