The Impact of Costs on Recent Target Date Fund Performance

Volume 15, Number 4, 2017
C. Edward Chang, Thomas M. Krueger and Mark A. Wrolstad

Target date funds (TDFs) are rapidly becoming a common means to prepare for retirement. Given the swelling demand for these funds, this research is a timely look at TDFs’ most recent decade. As of March 2016, 518 TDFs have been in existence for over ten years, providing a good sample period by which to assess their performance. Analysis of the entire universe of TDFs with ten years of data reveals that a significant factor in differentiating between better and worse TDF investment performance is their expenses and loads. Among the TDFs with the lowest 25% of expenses, we find significantly better returns without an appreciable impact on standard deviation of returns or beta. Selecting TDFs without loads increases both returns and risk measures. Risk-adjusted returns using standard deviation, negative return variance, or beta all demonstrate the value of avoiding high expenses and load/commission fees.