Existing research argues that many target date funds feature excessive fees and suboptimal allocation choices, and that investors could achieve superior outcomes by self-directing their retirement accounts. This paper provides evidence that a first-order benefit of target date funds is their impact on investor behavior. Participants in a laboratory experiment are less likely to eliminate equity allocations following a stock market crash when they are invested in a target date fund. In a carefully calibrated simulation exercise, this behavioral benefit of target date funds provides significant increases in welfare even with economically meaningful fees and distorted glide paths.

Mutual funds face the risk of withdrawals if they perform poorly in the short term, which encourages manager myopia. We show that fund families can insulate managers from this funding pressure via compensation tied to long-term fund performance. Managers with long-horizon contracts are more likely to undertake long-term investments and outperform their constrained peers. Since long-horizon pay does not shut off the funding pressure but simply insulates the manager from it, not all families can offer these contracts. Long-horizon contracts are more prevalent in families that cater to patient investors and have more resources to buffer liquidity shocks.