Working Paper: NBER ID: w26684
Authors: Olivia S. Mitchell; Stephen Utkus
Abstract: Target date funds in corporate retirement plans grew from $5B in 2000 to $734B in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Including these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.
Keywords: Target Date Funds; 401(k) Plans; Portfolio Choice; Retirement Savings; Behavioral Finance
JEL Codes: D12; D14; D91; G5; G51; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Introduction of TDFs (C22) | Participants' portfolio choices (G11) |
| TDF adoption (Y10) | Decision-making dynamics for participants (D70) |
| TDF adoption (Y10) | Average increase in equity share (D33) |
| TDF adoption (Y10) | Reduction in idiosyncratic risk (G32) |
| Improved returns from TDFs (G12) | Enhanced retirement wealth (G51) |
| Employer's choice of TDFs as default (G11) | Adoption rates of TDFs (Y10) |