Working Paper: NBER ID: w31640
Authors: Jonathan A. Parker; Yang Sun
Abstract: Target Date Funds (TDFs) provide retirement investors, many of whom are unsophisticated or inattentive, with age-appropriate exposures to different asset classes like stocks and bonds. To maintain exposures, TDFs trade actively against market returns, buying stock funds when the stock market does poorly, and selling when the market does well (Parker, Schoar, and Sun, 2023). This paper shows that trading by TDFs was a significant stabilizing force in US equity markets during the unprecedented economic volatility of the COVID-19 pandemic period. Specifically, TDFs – now comprising a quarter of all 401(k) plan assets – caused significant contrarian investment flows across asset classes, flows that were not undone by enrollment of TDF investors or by discretionary actions by TDF managers. Mutual funds with large ownership by TDFs had more stable funding through the pandemic, and stocks that had greater indirect ownership by TDFs had lower co-movement with the market and lower volatility during the pandemic period.
Keywords: Target Date Funds; Market Stabilization; COVID-19; Retirement Savings
JEL Codes: G12; G23; G51; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TDF trading (F16) | market stability (D53) |
| TDFs (Y10) | contrarian investment flows (F21) |
| contrarian investment flows (F21) | market volatility (G17) |
| TDFs (Y10) | price volatility of underlying stocks (G17) |
| TDF trading behavior (C69) | stable funding for mutual funds (G23) |
| higher indirect ownership by TDFs (G39) | lower overall volatility (G19) |
| TDFs (Y10) | shift in investor behavior from trend-chasing to contrarian trading (G41) |