Working Paper: NBER ID: w17886
Authors: Pierluigi Balduzzi; Jonathan Reuter
Abstract: Following the Pension Protection Act of 2006, there was a sharp increase in the use of TDFs as default investment options in defined contribution retirement plans. We document large differences in realized TDF returns and risk profiles, even for funds with the same target retirement date. Using fund-level data, we find evidence that this heterogeneity reflects optimal risk-taking by fund families with low market share, especially those entering the market after 2006. Using plan-level data, we find little evidence that 401(k) plan sponsors match the risk profile of the TDFs in their plans to the risks of their companies.\n
Keywords: Target-Date Funds; Pension Protection Act; Risk-Taking; Risk Matching
JEL Codes: G11; G18; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal risk-taking by fund families with low market share (G11) | Heterogeneity in TDF returns (C22) |
| Market entry timing (D40) | Risk-taking behavior of new TDFs (G40) |
| Risk-adjusted performance (G11) | Flows into TDFs (F21) |
| Risk profiles of TDFs (G52) | Risk characteristics of sponsoring firms (G32) |
| Risk-taking incentives (G11) | Heterogeneity in TDF behavior (C22) |