Agency Problems in Target-Date Funds

50 Pages Posted: 23 Mar 2010 Last revised: 28 Dec 2011

Vallapuzha Sandhya

Financial Engines; Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 3 versions of this paper

Date Written: March 14, 2010

Abstract

Target-Date Funds (TDFs) facilitate retirement planning by varying asset allocation over time with the goal of reducing portfolio risk. We explore potential agency problems in TDFs by examining their return performance and flow-performance relation. We find that TDFs under-perform balanced funds (BFs) which are also approved as a default option along with TDFs in 401(k) plans with automatic enrollment. We show that the under-performance is driven by TDFs that have a fund-of-fund structure and constituent funds with high expense ratios or poor performance within the fund family. Additionally, we discover an absence of flow-performance relation in TDFs while BFs exhibit the convex flow-performance relation shown for mutual funds. Our evidence suggests the presence of agency problems in TDFs arising from investor inertia, weak incentives for fund managers to outperform peers, and opportunities for fund families to gain private benefits.

Keywords: Mutual Funds, Target Date Funds, Agency Problems, Life Cycle funds, Retirement plan, 401(k) Plans

JEL Classification: G10, G11, G19

Suggested Citation

Sandhya, Vallapuzha, Agency Problems in Target-Date Funds (March 14, 2010). Available at SSRN: https://ssrn.com/abstract=1570578 or http://dx.doi.org/10.2139/ssrn.1570578

Vallapuzha Sandhya (Contact Author)

Financial Engines ( email )

1804 Embarcadero Road
Palo Alto, CA 94303
United States

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

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