The Unintended Consequences of Investing for the Long Run: Evidence from the Target Date Funds
79 Pages Posted: 30 Nov 2020 Last revised: 7 Oct 2021
Date Written: November 1, 2020
We study how managers of funds created to invest for the long run behave when shielded from liquidity constraints and their investors' short-term needs. Using the universe of US target-date funds (TDFs), we document that asset managers exploit lower investor attention to deliver lower performance. This results in a hypothetical cumulative return loss of 21% for the average investor holding the fund for 50 years. This underperformance is driven by fund families using the TDFs to smoothen the flow shocks of the affiliated open-ended funds. It is also due to higher fees arising from investing in the affiliated expensive share classes. We use the Pension Protection Act of 2006 as an exogenous shock that made TDFs the default investment options within 401(k) retirement plans.
Keywords: Mutual Funds, Target-Date Funds, Retirement Savings, Mutual Funds Families, Open Architecture, Flow-Performance
JEL Classification: D12, D14, D91, G41, G51, J32
Suggested Citation: Suggested Citation