Practical Applications of An Analysis of the Performance of Target Date Funds

Abstract

In <b><i>An Analysis of the Performance of Target Date Funds</i></b>, from the Spring 2021 issue of <b><i>The Journal of Retirement</i></b>, authors <b>John Shoven</b> and <b>Daniel Walton</b> (both of <b>Stanford University</b>) investigate whether target date funds (TDFs) have helped investors diversify their portfolios while protecting them from market losses. TDFs have become wildly popular with retirement investors, even though the vehicles suffered large losses during the financial crisis of 2008–2009. Shoven and Walton examined how TDFs have performed since then, with a focus on the stock market crash of February–March 2020. They find that TDFs with the longest-term target dates allocated 85%–90% of assets to stocks, while the shortest-term TDFs had 50% in stocks. This means TDFs reduce their stock holdings over time but still leave people exposed to market losses as they get near retirement. In fact, during the crash of 2020, TDFs with a target date of 2025 lost 20%–25% of their value. The authors therefore question whether TDFs work as one-size-fits-all retirement investments. As an alternative, they suggest that retirement plans could offer an array of balanced funds, encourage participants to fill out risk tolerance questionnaires, and allow plan participants to choose funds that fit their goals and circumstances.