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 studies how fiduciary litigation risk arising from defined contribution (DC) plans affects indexing and pricing behavior in the mutual fund industry. Exploiting the 2015 Tibble v. Edison decision as a shock to the litigation risk faced by plan sponsors, I show that funds with greater exposure to DC plan assets become more passive in their portfolio choices, reducing both tracking error and active share. These responses appear to reflect efforts by fund managers to accommodate heightened concerns among plan sponsors about benchmark-relative underperformance, which often provides grounds for fiduciary claims. Funds with high exposure to plan assets reduce fees for institutional share classes, in which most such assets are invested, but increase fees for retail share classes, widening the retail–institutional fee gap by 2–3 basis points. The findings imply that fiduciary litigation risk can shape mutual fund behavior, encouraging closet indexing and shifting the fee burden toward retail investors.
Presentation: FMA Annual Meeting (2026, scheduled)