Investor Sophistication and Target-Date Fund Investing

Abstract

The Pension Protection Act of 2006 identified target-date funds as an appropriate default investment for defined contribution retirement plans. Using the 2009 National Financial Capability Study, this article examines the relationship between investor sophistication and the decision to primarily invest retirement assets in target-date funds. The article finds that Americans with low investor sophistication are 22% more likely than highly sophisticated investors to make target-date funds their primary retirement saving vehicle. It is possible that the Pension Protection Act improved the economic welfare of many Americans, given that this article provides evidence that investors who stand to benefit the most from target-date fund investing are the ones who are more likely to use the product.