Target Date Funds: What’s Under the Hood?

In today’s 401(k) world, individuals must choose how to invest their retirement savings. Yet evidence shows that they often make poor choices on their own. Target date funds (TDFs) were designed as a potential solution. TDFs provide a pre-set mix of stocks and bonds, which shifts away from stocks and toward bonds as individuals age. These funds are often used as the default option for 401(k)s that have automatic enrollment. By 2014, nearly 20 percent of all 401(k) assets were in TDFs, and about half of participants held these funds. Despite the growing prominence of TDFs, little research has focused on the details of their holdings, fees, and performance. This brief, adapted from a recent study, uses data on TDFs and their underlying mutual fund investments that allows for a unique assessment of what is going on “under the hood.” The discussion proceeds as follows. The first section offers background on TDFs. The second section describes the data. The third section looks at what assets TDFs hold. The fourth section examines TDF fees. The fifth section assesses their overall performance and the influence of day-to-day fund decisions. The final section concludes that: 1) TDFs often invest in specialized assets, as well as conventional stocks and bonds; 2) TDF fees are only modestly higher than if an investor assembled a similar portfolio on his own; and 3) TDF investment returns are broadly in line with other mutual funds; and TDF decisions on market timing and fund additions do not help, and may hurt, performance.