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Target Date Funds as Asset Market Stabilizers: Evidence from the Pandemic

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  • Jonathan A. Parker
  • Yang Sun

Abstract

Target Date Funds (TDFs) provide retirement investors, many of whom are unsophisticated or inattentive, with age-appropriate exposures to different asset classes like stocks and bonds. To maintain exposures, TDFs trade actively against market returns, buying stock funds when the stock market does poorly, and selling when the market does well (Parker, Schoar, and Sun, 2023). This paper shows that trading by TDFs was a significant stabilizing force in US equity markets during the unprecedented economic volatility of the COVID-19 pandemic period. Specifically, TDFs – now comprising a quarter of all 401(k) plan assets – caused significant contrarian investment flows across asset classes, flows that were not undone by enrollment of TDF investors or by discretionary actions by TDF managers. Mutual funds with large ownership by TDFs had more stable funding through the pandemic, and stocks that had greater indirect ownership by TDFs had lower co-movement with the market and lower volatility during the pandemic period.

Suggested Citation

  • Jonathan A. Parker & Yang Sun, 2023. "Target Date Funds as Asset Market Stabilizers: Evidence from the Pandemic," NBER Working Papers 31640, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31640
    Note: AG AP EFG
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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