Assets in target-date mutual funds shrank in 2018, but the overall market grew, as providers gathered assets into low-cost alternatives like collective investment trusts (CITs) or new lower-cost target-date series that rely on passive funds.
Morningstar reports that assets in target-date strategies totaled more than $1.7 trillion at the end of 2018, with $1.1 trillion in mutual funds and approximately $660 billion target-date CITs.
The demand for lower-cost options propelled growth in target-date series offered as CITs, which typically cost less than mutual funds, according to the Chicago-based Morningstar.
In 2018, assets in target-date CITs totaled approximately $660 billion, a roughly $30-billion increase in a year when returns were negative.
“Price drove demand for a target-date fund in 2018,” the firm notes in its annual Target-Date Fund Landscape Report.
Nearly all the $55 billion estimated net flows to target-date mutual funds in 2018 went to low-cost series that held more than 80% of assets in index funds. Furthermore, assets moved to lower-cost share classes, bringing the average asset-weighted expense ratio down to 0.62% from 0.66% in 2017.
Target date market stats
- Assets in target-date mutual funds receded slightly in 2018 for the first time since 2008. Even though assets in target-date mutual funds fell to $1.09 trillion at the end of 2018 from $1.11 trillion at year-end 2017, they remain a popular option for investors, seeing an estimated $55 billion in net inflows from investors for the year.
- Catering to low-fee investor demand, multiple providers have launched less-expensive alternatives to their higher-priced legacy offering or made their strategy available in lower-cost vehicles like CITs. However, returns of a target-date provider’s newer, lower-cost series didn’t always outpace those of the legacy. Of the 10 target-date series that replicate a legacy offering but with lower fees, the since-inception returns for three failed to keep pace.
- Vanguard claimed nearly 40% of the target-date fund market at year-end 2018 and held roughly $650 billion in total assets across its mutual fund and CIT series.
- “Passive target-date funds” do not exist. The analysis of sub-asset-class glide paths identified significant differences in approaches—even between series that invest only in index funds—that are not apparent by examining strategic equity glide paths.
- Only 16 of the roughly 140 target-date fund managers invested more than $1 million in their series as of year-end 2018. Of that 16, four of the six managers who run multiple series invest more in a higher-cost, legacy offering that relies predominantly on actively managed underlying holdings.
The landscape report is available here.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and 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. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.