Analyzing the Underperformance and Costs of Target Date Funds

In this episode, we’re joined by David C. Brown, Associate Professor of Finance at the University of Arizona, for a deep dive into the mechanics, performance, and pitfalls of target date funds (TDFs)—the most common investment vehicle in U.S. retirement accounts. David has spent years researching glide paths, benchmarking methods, and industry practices to uncover whether these “set it and forget it” funds actually serve investors well. We unpack why benchmarking TDFs is so difficult, what really drives their underperformance, and how tactical deviations from strategic glide paths often harm investors. David explains how fees, active management, and fund structure combine to create persistent drag—and why dispersion across TDF providers is shockingly wide. We also discuss behavioral challenges, the influence of glide path design, and whether innovations like “indexing the indexers” could improve outcomes. David also shares insights on his side project, the Microsoft Excel Collegiate Challenge, where students compete in gamified problem-solving competitions (yes, Excel on ESPN!), and reflects on his own definition of success. This conversation sheds light on a massively important—but often misunderstood—corner of the retirement landscape, giving investors and plan sponsors practical tools to demand better.

Key Points From This Episode:

(0:05:20) What a Qualified Default Investment Alternative (QDIA) is and why TDFs became the default in 2006.

(0:05:50) How target date funds work as “one-stop shops” for retirement savings.

(0:07:12) The glide path concept: why equity allocations decrease with age.

(0:08:04) Why comparing TDFs is hard—fund families design glide paths differently.

(0:10:37) David’s benchmarking approach: replicating TDFs with index funds.

(0:15:13) The performance gap: ~1% annual underperformance versus replicating benchmarks.

(0:15:50) Main culprits: higher fees (~55 bps) and poor active management (~45 bps).

(0:18:20) Good news: costs have declined—but dispersion across providers remains massive.

(0:20:09) Evidence of wild return differences: up to 23% in a single month across vintages.

(0:21:32) Why plan sponsors and investors aren’t reacting to poor performance.

(0:25:33) The debate over optimal glide paths—and why the jury is still out.

(0:29:15) Tactical deviations: managers shifting allocations beyond the strategic design.

(0:33:06) These tactical moves hurt performance (~10 bps on average).

(0:35:49) Evidence of return chasing in TDF management.

(0:39:07) Big picture: TDFs are a huge improvement over money market defaults, but dispersion and inefficiency remain.

(0:42:48) David’s views on Scott Cederberg’s 100% equity lifecycle portfolio research.

(0:45:22) Behavioral challenges: why defaults and illiquidity may help investors stay the course.

(0:50:57) The Microsoft Excel Collegiate Challenge—Excel as an esport.

(0:52:50) How David defines success: balance, impact, and growth.

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.

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Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)