Assets grew but flows slowed, making for good and bad news about target-date funds in the difficult year of 2020.
Morningstar found total assets in target-date strategies stood at approximately $2.8 trillion at the end of 2020, an increase of 20% over the previous year. Yet flows into target-date funds and collective investment trusts (CITs) dropped to $52.3 billion in 2020, a 59% decline from 2019.
“The economic stress of the COVID-19 pandemic weighed on investors and retirement savers’ contributions over the course of 2020. We saw total net inflows to target-date strategies fall, employers suspending 401(k) matches, and an increase in investor withdrawal rates,” Jason Kephart, strategist for the multi-asset and alternative strategies manager research team at Morningstar, said in a statement.
However, he added that target-date funds are poised for continued growth and change.
“Longer-term trends show investors are prioritizing low-cost strategies and investing in collective investment trusts,” Kephart said. “Furthermore, there’s skepticism about how long new regulatory restrictions on sustainable investments within retirement plans will last, while rules around the use of alternative investments like private equity were relaxed.”
Key findings from The Target-Date Strategy Landscape Report include:
CITs
CITs continue to grow market share, now representing 43% of all target-date strategy assets and crossing the $1 trillion threshold for the first time.
Additionally, CITs are driving majority of product development within target-date strategies. Unlike target-date funds, CITs are only available through qualified retirement plans, and asset-management companies can negotiate fees with each plan separately. CITs will likely become even more important for target-date providers, as two bipartisan bills introduced in 2020 would lift restrictions on CITs in 403(b) plans.
Fees
Fees continue to play an important role in shaping the target-date strategy competitive landscape. Against the backdrop of a decline in contributions in 2020, the bulk of net inflows went to the industry’s cheapest share classes.
The average asset-weighted fee for target-date funds, which depicts the actual cost investors are paying, fell to 0.52% from 0.58% in 2019, and 0.73% five years ago.
New money
The BlackRock LifePath Index series collected the most net new money among target-date series, collecting approximately $22 billion in net contributions between its mutual funds and CITs.
It’s the first year since 2008 that Vanguard hasn’t collected the most net new money among target-date strategies. Vanguard Target Retirement saw net inflows into its mutual funds and CITs drop by approximately 70% to $19 billion, yet it is still the first target-date strategy to surpass $1 trillion in assets.
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.
