Target date funds, drawdown risk, and Central Bank intervention: Evidence during the COVID-19 pandemic

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...

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Bibliographic Details
Published inJournal of risk and financial management Vol. 15; no. 9; pp. 1 - 18
Main Authors Iyer, Arjun K, Hoelscher, Seth A, Mbanga, Cedric
Format Journal Article
LanguageEnglish
Published Basel MDPI 01.09.2022
MDPI AG
Subjects
Asset allocation
Central banks
Coronaviruses
COVID-19
Deferred compensation
drawdown
Financial instruments
government intervention
Households
Intervention
Investments
Lifecycle funds
Pandemics
retirement
Retirement plans
Securities markets
target date funds
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Summary: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.
ISSN:1911-8074
1911-8066
1911-8074
DOI:10.3390/jrfm15090408