Do participants in target date funds behave better than their non-TDF invested counterparts?
It’s a major selling point for the product, and generally the answer appears to be yes. However, Morningstar reports that “some strategies nearer to the retirement date skidded to big losses, rattling investors.”
The Chicago-based research firm released its annual Target date Strategy Landscape Report, which examined investor usage of target date strategies throughout 2019 and amid recent market volatility.
It found that despite the turbulence of the first-quarter, most target date funds performed in line with expectations. However, outcomes varied meaningfully for near retirees, ranging from -7% for the target date retirement category to -20% for the target date 2060+ category.
Morningstar also found that collective investment trusts (CITs) have outgrown target date funds in recent years to account for approximately 40% of the industry’s market share. Unlike target date funds, CITs are only available through qualified retirement plans, and asset-management companies can negotiate fees with each plan separately.
According to the report, TDF fees are falling, a few fund families dominate, and the SECURE Act could have major ramifications for the product moving forward.
Investors in “through” series benefited from the bull
2020 target date funds that continue to lower the allocation to equities after the retirement date, or “through” series, fared worse than funds that hold steady allocations once they reach the target date, or “to” series. The average 2020 “to” series lost 8.4% in the first quarter of 2020 versus an average loss of 10.6% in “through” series.
CITs growing faster than target date mutual funds
In 2019, CITs received an estimated $69 billion of net inflows, or 10% organic growth rate. Target date mutual funds had approximately $59 billion of inflows last year, but because of their higher starting asset base that equals an organic growth rate of 5.4%.
TDFs continued to feel downward fee pressure
The ongoing trend is driven by investors choosing cheaper share classes. In 2019, $58 billion went into share classes that charge less than 0.20%, up from $51 billion in 2018. Share classes that fall more squarely in the middle and charge between 0.41% and 0.60%, saw net outflows of $3 billion in 2019. That’s a reversal from 2018, when those share classes had $19 billion of net inflows.
CITs have benefited from low fee trend
The market share of CITs has grown to roughly 40% as of March 2020, up from less than 20% in 2014. The emphasis on CITs is also evident when looking at new series launches. Over the past three years, CIT series launches have outpaced mutual fund launches by nearly five to one.
The target date industry remains top-heavy
The top five by assets represent 79% of target date strategy assets, up from 78% in 2018. BlackRock and American Funds both gained market share during the year, while Vanguard and Fidelity held steady, and T. Rowe Price lost a bit of ground. Vanguard, whose series boast low costs, remains the most popular target date series. Its market share at the end of March 2020 reached approximately 37%.
SECURE Act could have meaningful TDF ramifications
The legislation eases the liability risks plan sponsors face when offering annuities to participants and opens the door for annuities within a target date series’ glide path. The inclusion of a guaranteed income option raises due diligence questions for investors, with a microscope on fees, contract structure, and impact on the glide path.
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.
