Are target date funds the easy bake option?

Anup K. Basu*, Brett M. Doran, Michael E. Drew

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Target date funds provide a simple, automated approach to retirement savings in defined contribution plans. The passing of the Pension Protection Act of 2006 has seen an increase in the popularity of these funds in the United States, becoming the default option for many plans. However, recent research findings have challenged the easy bake or 'set-and-forget' nature of target date funds. This study explores some of the critical design features of target date funds (which shifts an individual's asset allocation from growth to defensive assets following a pre-set glidepath) against a simple balanced (or target risk) fund design. Using both time-weighted and dollar-weighted returns, our results suggest that there is more to achieving successful retirement outcomes than the investor simply selecting a proposed year of retirement. Our findings can perhaps be summarized by Einstein's famous epithet, that in the murky world of retirement product design, everything should be made as simple as possible, but not simpler.

Original languageEnglish
Pages (from-to)199-206
Number of pages8
JournalJournal of Financial Services Marketing
Volume18
Issue number3
DOIs
Publication statusPublished - Sep 2013
Externally publishedYes

Keywords

  • financial target date funds
  • financial literacy
  • retirement outcomes

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