Target Date Funds and Portfolio Choice in 401(k) Plans

35 Pages Posted: 12 Feb 2020

See all articles by Olivia S. Mitchell

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Stephen P. Utkus

Vanguard

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2020

Abstract

Target date funds in corporate retirement plans grew from $5B in 2000 to $734B in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Including these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.

Keywords: automatic enrollment, pension, portfolio allocation, endorsement effect, default effect, retirement saving, 401(k)

JEL Classification: D12, D14, D91, G41, G51, J32

Suggested Citation

Mitchell, Olivia S. and Utkus, Stephen P., Target Date Funds and Portfolio Choice in 401(k) Plans (January 9, 2020). Wharton Pension Research Council Working Paper No. 2020-03. Available at SSRN: https://ssrn.com/abstract=3535910 or http://dx.doi.org/10.2139/ssrn.3535910

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen P. Utkus

Vanguard ( email )

100 Vanguard Boulevard, G13
Malvern, PA 19355
United States
610-669-6308 (Phone)

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