Active ingredients: How actively managed holdings shape target date fund performance and costs

This paper examines the impact of active funds held by target date funds (TDFs). Results indicate holding more funds with active management benefits TDF performance, on average. The benefit is driven by domestic equity holdings for TDFs that are far from the target date and domestic income holdings for TDFs that are near or past the target date. Time to target and market conditions impact TDF choice of activeness. TDFs benefit from embracing their family's core competency of active/passive management, and the largest families' TDFs outperform. Finally, holding more active funds is associated with higher TDF expense ratios.