Target Date Funds: Characteristics and Performance

34 Pages Posted: 11 Jan 2015 Last revised: 3 Apr 2015

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Andre de Souza

St. John's University - Department of Economics and Finance; New York University (NYU) - Department of Finance

Christopher R. Blake

Fordham University - Gabelli School of Business

Date Written: March 23, 2015

Abstract

Research has shown that individual investors make poor asset allocation decisions in 401k plans. In response to this research, 72% of all 401k plans now offer Target Date Funds where asset allocation decisions are made for the investor and 43% of the assets of young 401(k) plan participants are invested in them. This paper is a comprehensive study of the characteristics and performance of these vehicles. We show that Target Date Funds are very active in there allocation decisions and this does not help the investors. Furthermore they hold many types of asset categories like commodities and sector funds not normally thought of as part of their portfolio. We find many of their asset allocation decisions satisfy fund family goals rather than investor goals. Finally a simple strategy of passively holding their initial allocation almost always produces higher Sharpe ratios than those of the target date funds.

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and de Souza, Andre and Blake, Christopher R., Target Date Funds: Characteristics and Performance (March 23, 2015). Available at SSRN: https://ssrn.com/abstract=2547558 or http://dx.doi.org/10.2139/ssrn.2547558

Edwin J. Elton (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Andre De Souza

St. John's University - Department of Economics and Finance ( email )

101 Astor Place, #244
New York, NY 10003
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Christopher R. Blake

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Lowenstein Building
New York, NY 10023
United States
212-636-6750 (Phone)

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