Off Target: On the Underperformance of Target-Date Funds

73 Pages Posted: 23 Nov 2020 Last revised: 21 Oct 2023

See all articles by David C. Brown

David C. Brown

University of Arizona - Department of Finance

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Date Written: June 3, 2023

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

Suggested Citation

Brown, David C. and Davies, Shaun, Off Target: On the Underperformance of Target-Date Funds (June 3, 2023). Available at SSRN: https://ssrn.com/abstract=3707755 or http://dx.doi.org/10.2139/ssrn.3707755

David C. Brown

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-626-0746 (Phone)

HOME PAGE: http://www.davidclaytonbrown.com

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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