Heterogeneity in Target-Date Funds: Optimal Risk Taking or Risk Matching?

The recent growth in the market for target-date funds (TDFs) allows us to study how mutual fund families structure new investment products. Given the widespread, legislation-induced use of TDFs as default investments in defined contribution retirement plans, this market holds special policy significance. We document pronounced heterogeneity in TDF returns between 1994 and 2009. We find strong evidence that return heterogeneity reflects optimal risk taking by families new to the market, with few assets to lose. We find little evidence that 401(k) plan sponsors match the risk profile of the TDFs in their plans to the risks of their companies.