Risk-Taking and Retirement Investing in Mutual Funds

Abstract:     
Savings of retirement and non-retirement investors are bundled together in the same mutual fund in the US although these investors differ along many dimensions. In particular, we ask whether managers of retirement money adopt investment strategies with greater market exposure, following the advice often advocated by practitioners for long-horizon retirement investors. Using difference-in-difference tests, we find strong evidence that funds raise their market risk exposure substantially in response to the increase in retirement money in the fund and that this larger risk appetite is not compensated for with improved excess returns on retirement accounts. Our results suggest that bundling of retirement and non-retirement assets can create serious agency conflicts between the investor bases and with the manager. Absence of a regulatory requirement to disclose the composition of the two asset groups leaves investors unaware of potential conflicts and can complicate retirement planning.

Number of Pages in PDF File: 43

Keywords: Retirement saving, agency conflicts, risk-taking, mutual funds

JEL Classification: G11, G23

working papers series