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An Analysis of the Performance of Target Date Funds

John B. Shoven and Daniel B. Walton
The Journal of Retirement Spring 2021, jor.2021.1.084; DOI: https://doi.org/10.3905/jor.2021.1.084
John B. Shoven
is the Charles R. Schwab Professor of Economics Emeritus at Stanford University in Stanford, CA
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Daniel B. Walton
is a PhD candidate in the Economics Dept., Stanford University in Stanford, CA
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Abstract

This article presents a thorough evaluation of target date funds for the period 2010–2020. Target date funds have grown enormously in assets, reaching $1.4 trillion at the end of 2019, and account for approximately 24% of all assets in 401(k) accounts. We report on the results of a style analysis evaluation of TDFs that determines their effective asset allocation. It examines both the constant in the style analysis regressions and resulting Sharpe ratios, which reflect the over- or under-performance of the funds relative to a passive benchmark with the same asset allocation. Lower cost TDFs tend to match the benchmark returns, while higher cost TDFs deviate from them considerably. We examine how TDFs performed in the stock market crash between February 19 and March 23, 2020, during which five-week period broad market averages fell by about one-third. We find that the value of long-dated TDFs (those with a target date of 2045 and beyond) fell by between 30% and 35%, while the 2025 funds, designed for people roughly 60 years old, lost between 20% and 25% of their value. We find that past performance only weakly influences future expected performance. As with equity funds in general in this period, TDFs with actively managed ingredient funds, on average, trailed the performance of their cheaper passively managed counterparts.

TOPICS: Pension funds, portfolio theory, risk management, performance measurement

Key Findings

  • ▪ Even near term TDFs have considerable equity exposure. For instance, 2025 TDFs lost between 20 and 25% of their value in the five weeks between February 19 and March 23, 2020. Many longer horizon TDFs did no better than pure equity funds in this period.

  • ▪ 75% of actively managed TDFs failed to do as well as the best fitting set of reference ETFs.

  • ▪ Past performance is only a weak predictor of future performance for TDFs. An extra 1% per year return in 2010–14 period only increases the expected return in 2015–19 by 9 basis points per year.

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An Analysis of the Performance of Target Date Funds
John B. Shoven, Daniel B. Walton
The Journal of Retirement Mar 2021, jor.2021.1.084; DOI: 10.3905/jor.2021.1.084

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An Analysis of the Performance of Target Date Funds
John B. Shoven, Daniel B. Walton
The Journal of Retirement Mar 2021, jor.2021.1.084; DOI: 10.3905/jor.2021.1.084
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  • Article
    • Abstract
    • DATA
    • THE GROWTH OF TARGET DATE MUTUAL FUNDS
    • EXPENSES
    • STYLE ANALYSIS
    • A NATURAL STRESS TEST: FEBRUARY 19 TO MARCH 23, 2020
    • PERFORMANCE MEASURES AND STYLE ANALYSIS
    • RETURN VS. RISK AND LONGER-TERM PERFORMANCE
    • ONE SIZE FITS ALL OR ONE SIZE FITS ALMOST NOBODY?
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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