The Unintended Consequences of Investing for the Long Run: Evidence from Target Date Funds

86 Pages Posted: 30 Nov 2020 Last revised: 22 Apr 2022

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Centre for Economic Policy Research (CEPR)

Date Written: November 1, 2020

Abstract

We study how managers of funds created for the long run behave when shielded from liquidity constraints and their investors' short-term needs. We focus on Target Date Funds (TDFs) for which the investment horizon of investors changes deterministically over time and is not due to specific idiosyncratic characteristics of the fund that can affect investor demand and spuriously link the investment horizon and unobservable fund characteristics. Our evidence suggests that asset managers exploit reduced 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. We find that this underperformance is driven by fund families using TDFs to smooth the flow shocks by overweighting affiliated open-end funds in the TDF portfolio. It also results from the 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 option within 401(k) retirement plans.

Keywords: Mutual Funds, Target-Date Funds, Retirement Savings, Mutual Funds Families, Open Architecture, Flow-Performance Sensitivity

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

Suggested Citation

Massa, Massimo and Moussawi, Rabih and Simonov, Andrei, The Unintended Consequences of Investing for the Long Run: Evidence from Target Date Funds (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3729750 or http://dx.doi.org/10.2139/ssrn.3729750

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania ( email )

3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6301
United States

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

Andrei Simonov (Contact Author)

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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