Investor Sophistication and Target-Date Fund Investing
Guillemette, M. A., Martin, T. K., Gibson, P. (2015). Investor Sophistication and Target-Date Fund Investing. Journal of Retirement, 2(4), 22-29.
Posted: 21 May 2019
Date Written: February 18, 2015
The Pension Protection Act of 2006 identified target-date funds as an appropriate default investment for defined contribution retirement plans. Using the 2009 National Financial Capability Study, this paper examines the relation between investor sophistication and the decision to primarily invest retirement assets in target-date funds. The results show that Americans with low investor sophistication are 22.2% more likely to primarily use target-date funds to save for retirement, compared to highly sophisticated investors. It is possible that the Pension Protection Act created a positive economic impact given that this paper provides evidence that investors who stand to benefit the most from target-date fund investment are the ones who are more likely to use the product.
Keywords: target-date fund, life-cycle fund, investor sophistication, retirement savings
JEL Classification: J26, G18, 128, O16
Suggested Citation: Suggested Citation