Importance of Costs in Target Date Fund Selection Using Three Morningstar Ratings

Chang, C.S.; Krueger, Thomas M.; Witte, H. Doug

doi:10.3905/jor.2021.1.085

Cited by 3 publications

(4 citation statements)

References 28 publications

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“…This may also be part of a strategy to chase ratings. Chang et al (2021) find that among TDFs, Morningstar assigns significantly higher ratings to those with lower fees. 5 We also investigate the economic significance of these results through a bootstrap simulation, which reveals substantial differences in cumulative wealth based on investing in TDFs with high vs. low expense ratios, as well as low vs. high equity allocation.…”

Section: Introductionmentioning

confidence: 74%

“…The main source of the better performance of the replicating portfolios is the lower fees, and to some extent the cash holdings of TDFs. Focusing on the relationship between TDF expenses and Morningstar ratings, Chang et al (2021) show that lower cost funds are associated with higher Morningstar Analyst ratings and Quantitative ratings. More recently, Shoven & Walton (2021) investigate the performance of TDFs relative to a passive benchmark with the same asset allocation.…”

Section: Related Literaturementioning

confidence: 97%

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Performance dispersion among target date funds

Pavlova,

Hibbert

2024

J Asset Manag

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There are significant differences in the performance of Target Date Funds (TDFs) with the same target year. Using a unique dataset from Morningstar, we show that within the same target year, funds with lower than the average expense ratio, or higher than average allocation to equities, outperform similar funds. This outperformance exists across all target year groups and is economically meaningful. Furthermore, deviations in the equity allocation have a greater impact on performance than does expense ratio. Using bootstrap simulations to investigate the impact over a longer horizon, we show that deviations from the average allocations or expense ratios have a meaningful impact on the retirement savings of an average investor.

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Section: Introductionmentioning

confidence: 74%

Section: Related Literaturementioning

confidence: 97%

Performance dispersion among target date funds

Pavlova,

Hibbert

2024

J Asset Manag

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“…Thus, TDFs incur the costs of holding the funds in addition to their costs. Chang et al (2021) explore the relationship between TDF costs and loads across three Morningstar ratings. Chang et al (2021) find that TDFs with no load charges and that are low cost receive higher Morningstar star ratings.…”

Section: Prior Literature and Research Questionsmentioning

confidence: 99%

“…Chang et al (2021) explore the relationship between TDF costs and loads across three Morningstar ratings. Chang et al (2021) find that TDFs with no load charges and that are low cost receive higher Morningstar star ratings. This finding holds for Morningstar Analyst and Morningstar Quantitative ratings as well.…”

Section: Prior Literature and Research Questionsmentioning

confidence: 99%

Target Date Funds, Drawdown Risk, and Central Bank Intervention: Evidence during the COVID-19 Pandemic

Iyer

Hoelscher

Mbanga

2022

JRFM

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Target Date Funds (TDFs) have become the default investment choice in retirement accounts for most households. Later-dated TDFs (e.g., further away from the present day) allocate a more significant percentage of each dollar invested into equities relative to fixed income. As the TDF moves closer to the designated retirement date, the TDF embarks on its’ glide path. We study the impact of the COVID-19 Pandemic and Federal Reserve intervention on the max drawdowns experienced by TDFs during 2020. Later-dated funds experienced more significant drawdowns relative to near-dated funds. Moving out one target date fund increased the drawdown by approximately 1.90%. Approximately 80% of TDFs experienced their max drawdown on 23 March 2020. The max drawdowns of the TDFs are then studied in the following three sub-periods: (1) before the first Federal Reserve Intervention (2 March 2020), (2) after the first intervention and before the second intervention (16 March 2020), and (3) the period after the second intervention. TDFs experienced the greatest drawdowns after the first intervention by the Federal Reserve (approximately 19%) relative to the other two periods (approximately 7%). Fees associated with the TDFs tend not to influence the drawdowns except for the near-dated funds, where the low-fee funds performed better. Finally, near-dated funds recovered from their max drawdowns around September 2020, whereas later-dated funds did not fully recover until December 2020.

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