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

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Rabih Moussawi

University of Pennsylvania - The Wharton School; Villanova University - Department of Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Date Written: November 1, 2020

Abstract

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

Massa, Massimo and Moussawi, Rabih and Moussawi, Rabih and Simonov, Andrei, The Unintended Consequences of Investing for the Long Run: Evidence from the 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

University of Pennsylvania - The Wharton School ( email )

United States

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

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

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

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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