Lower Fees for Target-Date Funds as Money Keeps Flowing In

Heather Larsen: As the default investment in many defined contribution plans, target-date funds continue to see large net inflows. And with increased popularity, comes increased competition. One way that investment managers have looked to make their series more attractive is by lowering fees.

Active strategies have managed to cut fees in two ways: swapping out underlying funds or moving to a flat-fee structure. MFS Lifetime managed to lower expenses in 2016 by replacing several of its fundamental, actively managed underlying strategies with seven quantitative equity funds. Fidelity Freedom cut expenses by charging a flat management fee, rather than rolling up the underlying fund fees, as is typical with fund of funds investments. This gives Fidelity Freedom more control over costs.

Meanwhile, new entrants to the target-date space have increasingly favored inexpensive underlying index strategies, which further dragged down the industry average expense ratio. In 2016, Charles Schwab launched an index-based series that investors can buy for an all-in cost of 8 basis points, making it the cheapest target-date option. DFA also recently launched a series that blends active and passive management for an attractive price.

As target-date managers continue to compete for new inflows, it's likely that fees will continue to trend downward.