Off Target: On the Underperformance of Target-Date Funds

Abstract

Target-date funds (TDFs) are popular retirement savings vehicles that provide diversification and dynamic asset allocation to investors. While TDFs hold trillions of dollars of assets, institutional features limit competition and make comparisons among funds difficult. We develop a novel means of benchmarking TDF performance that provides comparability and facilitates competition. Our benchmarking method utilizes mimicking portfolios of cost-efficient funds which we call Replicating Funds (RFs). RFs substantially outperform TDFs and exhibit low tracking error. In 2019, excess costs to investors totaled $8.6 billion.

Keywords: Target-Date Funds, TDFs, Exchange-Traded Funds, ETFs, Financial Planning, Benchmarking

JEL Classification: G10, G11, G23, G50, G51, G53