Heterogeneity in Target-Date Funds and the Pension Protection Act of 2006

This paper studies the evolution of the market for target-date funds (TDFs) during the 1994-2009 period. We document pronounced heterogeneity in the TDF universe: TDFs with the same target date have delivered very different returns because of differences in systematic risk in the stock allocations and because of differences in the stock vs. bond allocations. This heterogeneity has increased over time, especially after the passage of the Pension Protection Plan of 2006. Indeed, we can attribute the increased heterogeneity to the entry of new fund families in the TDF market during the 2007-2009 period. These developments in the TDF market are consistent with new entries in the market adopting a product-differentiation strategy. Our findings suggest that the widespread adoption of TDFs will not result in returns that are similar across investors enrolled in different 401(k) plans, and that the current proposals for further disclosure in TDF offerings may have little impact on the incentive for fund families to offer similar risk profiles.