Research
Research
Reaching for Yield in Target Date Funds
Abstract
Target date funds (TDFs) are widely considered passive “set-and-forget” vehicles that automatically rebalance for retirement savers. I challenge this view by showing that investors chase recent TDF performance and that managers, in turn, reach for yield to attract flows. Analyzing deviations from the glide path, the fund’s planned asset allocation, I find that managers systematically increase risk when interest rates are low by raising equity weights and substituting safer bonds for riskier ones. This tendency is more pronounced when managers face greater pressure to attract inflows. A stylized lifecycle model shows these deviations impose meaningful welfare losses, with an average cost of 1.2% of lifetime consumption. These costs disproportionately harm older investors, with losses reaching up to 2.6% for the oldest cohorts.
Presented at Brownbag Seminar at OSU (2025); FMA Doctoral Student Consortium (2025); FMA Special PhD Paper Presentations (2025)
Abstract
This study investigates the impact of the 2004 regulation, which mandated mutual funds to increase their portfolio disclosure frequency from semi-annual to quarterly, on the manipulation activities of mutual funds and the capital allocation decisions made by investors. Using a difference-in-difference approach, we find no compelling evidence indicating a decrease in portfolio manipulation practices such as portfolio pumping, style drift, and window dressing subsequent to the regulatory change. However, we observe a notable improvement in investment efficiency, reflected in the increased return predictability of fund flows. This improvement is primarily attributed to institutional investors’ enhanced ability to avoid underperforming funds. Our findings suggest that while greater portfolio transparency enables sophisticated investors to make better-informed asset allocation choices, the portfolio disclosure at quarterly frequency is insufficient to curb opportunistic behavior by fund managers.
Presented at Conference on Asia-Pacific Financial Markets (2024); Korea-Japan Finance Workshop (2024); Korean Academic Society of Business Administration (2024); Sungkyunkwan University (2023); Korea University (2023); AAA Annual Meetings (2021)
Abstract
This paper examines the effect of litigation risk on employer decisions in managing employer-sponsored defined contribution (DC) plans and its implications for plan participants. Leveraging a Supreme Court decision that significantly altered litigation probabilities around the three-year mark following fund adoption in 401(k) menus, I find that employers become more sensitive to removing poorly performing funds from the menus when faced with higher litigation risk. Moreover, replacement decisions triggered by enhanced litigation burden result in an improved menu with superior fund performance, equivalent to a 1.3% higher annual return on a fund. This improvement can ultimately contribute to an 8.0% increase in a participant's retirement savings. Employers also exhibit a preference for passive funds, which tend to entail lower ex-ante monitoring costs, particularly when litigation burdens are higher. These findings highlight the presence of agency conflicts between employers and employees and the disciplining effect of legal risk on employer-sponsored retirement plans.