Target-date funds: lessons learned?

Bin Chang and Laurence Booth

Abstract

Target-date funds are mutual funds with a date in their description. The date signifies the retirement date for the person for whom the mutual fund is designed. The basic proposition is that the fund’s composition will be adjusted as it evolves toward that date, which will relieve the investor of the problem of asset allocation. These funds received a significant boost in 2006 when they became the default choice of many defined contribution plans. However, in our 2011 paper in The Journal of Risk we showed that many funds significantly increased their allocation toward equities immediately prior to the 2007–9 global financial crisis and consequently saw significant losses. Since this was only shortly after target-date funds became a significant component of the mutual fund market, this research assesses the maturation of target-date funds and their performance during the Covid-19 pandemic, when there were again significant market losses. Overall, our assessment is that target-date funds have largely met their designation and there is no evidence of them similarly gaming their asset allocation as occurred prior to the financial crisis.