Target Date Fund Trends: AUM Rise, Fees Fall

For a product that stumbled out of the gate, the target date fund certainly recovered, and then some.

“Strong target date asset growth, fees continue to trend downward and six new series enter the market,” reports BrightScope in its latest findings.

The San Diego-based research firm examined the lowest cost institutional share class for all target date funds through February 2015. This includes 59 target date series, composed of 561 distinct target date funds from 40 different asset managers.

One of the most notable shifts noticed in the TDF market were the changes in distribution model.

Previously, record keepers such as Fidelity, Vanguard, and T. Rowe Price maintained their dominance by selling their own TDFs to plan sponsors. However, this model was appears to be changing. More and more, sponsors are looking off-platform to find the best TDFs for employees, and major companies such as iShares (the largest ETFs provider) have walked away from TDFs for lack of a strong distribution mechanism as a result of this trend. BrightScope believes this space will become increasingly competitive in the coming year, bringing even more changes in the overall market.

Other important points include the following:

Fees: Fees continue to fall, with the current average fee at .65 percent. Fees are down almost 10 percent since 2011.
Assets Under Management (AUM): TDF assets account for $700 billion in Investment Act of 1940 funds, a 12 percent increase over last year’s figures.
Entrants and Exits: This year saw significant movement in target date series, with three exits and six entrances into the market.
Glidepath and landing point: Glidepath’s stability continues, as noted in BrightScope’s last two reports, and equity at the stated target date funds is 41 percent. Equity at the landing point remains at 30 percent, where it has been holding strong since 2012.
“To” Fund Series: Fund families bringing their glidepath down to its most conservative position at the target date make up 25 of the 59 target date series in the study. To funds accounted for three of the new entrances into the target date market.
“Through” Fund Series: “Through” funds comprised all series leaving the market this year, and only accounted for half of the new series entrances (in 2014, this was 100).
Distribution: BrightScope observed a 7 percent decrease in proprietary target date assets since 2010.

“In the past year, we’ve seen greats shifts in the target date fund markets, including strong asset growth due to a strong equity market, fees continuing to shrink, and the industry overall moving away from a recordkeeper-distribution model,” said Brooks Herman, head of data and research at BrightScope. “Most importantly, we’ve witnessed an ongoing acknowledgement by plan sponsors and advisors that defined contribution participants prefer to have their retirement accounts professionally managed, and TDFs continue to be the vehicle of choice to meet this need.”

John Sullivan

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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.