If target-date funds (TDFs) were a country’s gross domestic product, they would be the fifth-largest in the world, ranking only behind the U.S., China, German and Japan.
That’s according to Morningstar’s latest Target-Date Fund Landscape report, published this week, revealing that target-date fund assets climbed to a record $4 trillion in 2024.
Yet beyond asset growth, the report highlights a more important takeaway: target-date funds have delivered for investors through a combination of good government policy and sound theory.
As the first large cohort of target-date 2025 investors reaches retirement, a full 15-year savings cycle reveals these investors saw average annualized returns of 7.3%, well exceeding expectations and demonstrating the effectiveness of these strategies in supporting retirement goals.
The report credits the Department of Labor’s late-2007 finalization of regulations allowing target-date funds to be qualified default investment alternatives (QDIAs) in retirement savings plans as providing the impetus for their surge in popularity, as it provided employers and fiduciaries a valuable liability shield—a compelling incentive—for plans to default employees’ 401(k) savings into TDFs.
CITs overtake mutual funds
The report also found that collective investment trusts (CITs) now dominate the market, surpassing mutual funds and accounting for 52% of target-date fund assets by year-end 2024. The shift is being driven by CITs’ lower costs and flexibility, making them increasingly popular among plan sponsors.
In fact, after years of waning activity, CITs were responsible for an uptick in target-date product launches in 2024. Among the 23 new target date series launches, some of the more notable new CIT products were of target-date funds with built-in annuities and similar automatic income-paying options. Solutions such as these aim to provide more predictable income streams for retirees, addressing concerns about market volatility and longevity.
In 2024, asset managers reported $39.8 billion in target-date fund conversions from mutual funds to CITs—an increase from 2023’s $22.6 billion in conversions, but not as high as the $56.5 billion conversion peak seen in 2022.
Vanguard remains top TDF asset manager
The new report shows the TDF landscape remains top-heavy with assets concentrated in a small handful of firms. For the past 10 years, Vanguard remains atop the group with assets more than double that of its next largest competitor, Fidelity. The report notes Vanguard has done so with just a single mutual fund and single CIT series, both index-based, while Fidelity has eight across its mutual fund lineup alone.
T. Rowe Price, BlackRock and Capital Group round out the top five, which account for more than 80% of combined mutual fund and CIT assets. The remaining 19% is split between more than three dozen asset managers.
Vanguard also led asset growth once again, adding $35.1 billion in new flows. BlackRock and Capital Group/American Funds followed with $19.2 billion and $16.8 billion, respectively.
Fees still falling
Taking a look at fees, the report shows they have continued to decline (although at a slower pace compared with previous years), with the asset-weighted average for mutual funds falling to a new low of 29 basis points. Fees have dropped almost 50% over the past decade.
The full Morningstar Target-Date Landscape report, which includes Morningstar Medalist Ratings for analyst-covered target-dates, can be accessed at this link.
SEE ALSO:
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• Target Date Trends: 15% Growth in 2024; Fees Continue to Fall
• When ‘Risk On’ Fades, TDFs Face the Prudence Test. Baby Boomers Beware
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.