Beyond the Glide Path: The Drivers of Target-Date Fund Returns

Abstract

The authors explore the relative importance of the three primary drivers of target date fund (TDF) performance: equity (or market) exposures (which across a series' vintages combine to form a glide path), style exposures (intrastock and intrabond allocations), and other investment selection decisions (e.g., manager selection and the active/passive decision, as well as any other residual risk exposures). They find that overall equity exposure drives only about 25% of the variation in returns across TDFs versus approximately 30% for style and 45% for selection, on average. Consequently, the analysis of the riskiness of a given TDF must be based on more than the overall weight given to equites.