Research
Research
Reaching for Yield in Target Date Funds
Abstract
Target date funds (TDFs) are widely perceived as passive "set-and-forget" investment vehicles that automatically rebalance for retirement savers according to a predetermined schedule. I challenge this view by showing that investors chase recent TDF performance and that managers, in turn, adjust their allocation schedules to reach for yield. Examining changes in the glide path, the fund’s planned asset allocation, I find that managers systematically increase portfolio risk when interest rates are low, and that this tendency is more pronounced when they face greater pressure to attract flows. A lifecycle simulation shows that these adjustments generate economically meaningful welfare losses for households, equivalent to about 1.4% of retirement consumption.
Presentations: SWFA Annual Conference (2026); MFA Annual Meeting (2026); FMA Special PhD Paper Presentations (2025); FMA Doctoral Student Consortium (2025); Brownbag Seminar at OSU (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.
Presentations: 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 Meeting (2021)
Abstract
This paper examines how litigation risk shapes employer decisions in managing defined contribution (DC) plans and the resulting effects on participants. Exploiting a Supreme Court decision that sharply increased litigation risk around the three-year mark after a fund is added to a 401(k) menu, I show that employers become more likely to remove underperforming funds when facing higher legal exposure. These litigation-induced replacements improve menu quality, raising fund performance by the equivalent of 1.3% in annual returns and increasing participants’ retirement savings by up to 8.0%. Employers also shift toward passive funds, which carry lower monitoring costs, when litigation risk is elevated. These findings highlight agency conflicts between employers and employees and underscore the disciplining role of legal risk in employer-sponsored retirement plans.