Is Target-Date Mutual Fund Underperformance Rational?

This article investigates the performance of target date mutual funds (TDMFs) relative to several passive indexes by using widely accepted mutual fund performance measures—Sharpe, Sortino, and Omega ratios; FF-3; and FF-6—and find that TDMF performance is negative and significant in nearly all performance measures. The authors also find that TDMFs provide other benefits for investors searching for a choice between active and passive investing. They speculate that several investor biases may explain the paradox of the popularity and underperformance of TDMFs. The results of this article are very important for choice architects and individual investors responsible for retirement plan decisions in that TDMFs fill the current void in retirement plan offerings and will most likely continue to rise in popularity. This article also reveals the need to develop measurement tools designed specifically to determine the performance of TDMFs