With assets in TDFs reaching $1.1 trillion and expected to continue growing rapidly, several studies have been conducted regarding the outcomes of TDF participants compared to those investors who have made allocation decisions on their own (“do-it-yourselfers”). There are two key takeaways from this research:
- For each age group, there has been less dispersion in the returns of TDF investors than for do-it-yourself investors. The range of outcomes (returns) for do-it-yourselfers has been broader and returns are less correlated with age than those of TDF investors.
- TDF holders have experienced a return benefit not experienced by do-it-yourselfers, as investor behavior typically negatively impacts actual returns experienced by do-it-yourself investors.
Participant outcomes for the past five years, for both TDF investors and do-it-yourselfers, have been largely dependent on exposure to equities. While TDF investors’ exposure to equities is closely correlated with age, with equity exposure decreasing as investors age, Vanguard’s research  indicates that the equity exposure in the accounts of do-it-yourselfers is not as closely correlated to age. Furthermore, participant directed equity allocations have resulted in what we would consider extreme allocations for a subset of the youngest and oldest investors. Because the equity exposure for do-it-yourselfers varies so broadly, Vanguard’s research indicates that there is a high degree of dispersion in terms of total portfolio returns for each age group. Among TDF investors who invest in a single TDF, on the other hand, the exposure to equities steadily decreases as participants age. This leads to a range of outcomes that is significantly more limited for each age group.
In a recently published article,  Morningstar outlines two rate of return measures for funds: investor returns and total returns. In-vestor returns take into account cash inflows and outflows in order to measure an investor’s actual experience with a fund. Total re-turns, that are published by the mutual fund companies (and what PEI reports), do not take into account any cash flows. The difference between a fund’s investor return and its total return is what Morningstar calls a “return gap.”
According to Morningstar, over the past ten years, investor returns for TDFs are, on average, 1.1% higher than the average total return. In contrast, the investor returns across all other (non-TDF) funds are lower than total returns, with bigger negative return gaps for equity funds in particular. Morningstar’s research suggests that the returns experienced by TDF investors, as opposed to those experienced by do-it-yourself investors, benefit from one of the key tenets of TDFs: asset allocation decisions are made by investment professionals – not investors – and the portfolio’s asset mix is regularly rebalanced back to strategic targets. Unlike those of do-it-yourselfers, TDF participant contributions benefit from steady dollar cost averaging and rebalancing through different market environments. TDF investors are not moving in and out of funds and asset classes at inopportune times. The investor returns for do-it-yourselfers, on the other hand, are negatively impacted by participant behavior, as these investors tend to move balances from an underperforming fund or asset class to an outperforming fund or asset class – in effect, selling low and buying high.
 How America Saves 2015, Vanguard; Vanguard 2014 data.
 Morningstar: Investors Reap the Gains of Target-Date Funds, April, 7, 2015.