Off Target: On the Underperformance of Target-Date Funds
73 Pages Posted: 23 Nov 2020 Last revised: 21 Oct 2023
Date Written: June 3, 2023
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: Suggested Citation