Target Date Funds: Characteristics and Performance
34 Pages Posted: 11 Jan 2015 Last revised: 3 Apr 2015
Date Written: March 23, 2015
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.
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