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Vanguard's Target-Date Fund Flows Plummet in 2020

Overall, target-date fund annual flows turn negative for the first time.

  • Amid economic stress and uncertainty, investors pulled a net $6.7 billion from target-date mutual funds in 2020 after contributing a net $59.7 billion in 2019. It’s the first calendar year that target-date mutual funds had net outflows since Morningstar started tracking the data in 1994.
  • The December liquidation of the $10 billion KP Retirement Path series turned flows negative for the year; excluding that liquidation, investors contributed a net $3.5 billion for the year, the lowest net contribution since 2000.
  • Total target-date mutual fund assets still reached a record $1.58 trillion at the end of 2020, up from $1.38 trillion in 2019 as market appreciation lifted assets.
  • The average target-date category return in 2020 ranged from 15% for the vintages furthest from retirement, to 9% for funds in retirement.
  • Vanguard Target Retirement series saw the biggest year-over-year change in contributions. Its net inflows fell to less than $3 billion in 2020, down from $31 billion in 2019. Six of the top 10 mutual fund series ranked by flows in 2020 saw less flows last year than in 2019.
  • The Fidelity Freedom Index series attracted more net new money than any other target-date mutual fund series in 2020, the first year Vanguard hasn’t led the industry in flows since 2008. 
  • Of flows into the top 10 series, 60% went toward index-based series, highlighting the continued importance fees play in driving target-date flows.
  • This data doesn’t include flows into collective investment trusts, which made up about 40% of the target-date market at the end of 2019. Collective investment trust data is reported quarterly on a lag so year-end data is not currently available.

The first quarter’s market panic and the ensuing economic uncertainty have put retirement investments under pressure for both companies and participants. Overall contributions to target-date mutual funds turned negative for the first time in 2020.

Although the global stock market ended 2020 at all-time highs, the U.S. economy is still suffering from the COVID-19 pandemic, and retirement savers haven’t been immune to the pressure. Almost 4% of employers have suspended matching 401(k) contributions since March and 37% of plans report an increase in hardship withdrawals since then, according to a Plan Sponsor Council of America survey published in November 2020. The uptick in withdrawals was expected once the Coronavirus Aid, Relief and Economic Security Act (or CARES Act) passed in March. It waived the 10% early withdrawal penalty fee on hardship withdrawals up to $100,000 and allowed investors to spread out the taxes owed on the distribution over three years to reduce the tax burden in 2020.

Investors pulled a net $6.7 billion from target-date mutual funds in 2020, in contrast to a $59 billion net contribution in 2019. It’s the first calendar year of negative flows since Morningstar began tracking target-date fund flow data in 1994. Exhibit 1 shows the annual net flows into target-date mutual funds since 2015.

Exhibit 1: Target-Date Mutual Fund Net Flows


  - Source: Morningstar Direct, data as of Dec. 31, 2020.

Flows for 2020 were positive heading into December, but in the last month of the year the $10 billion KP Retirement Path series liquidated, pulling the year-end numbers negative. Still, excluding that series, overall target-date mutual fund net contributions would have been $3.5 billion, still a steep drop from the last several years.

Vanguard, the largest mutual fund target-date series with approximately $588 billion in assets, saw the biggest drop in net flows for the year. It collected less than $3 billion in 2020, down from more than $30 billion in 2019.  

Although target-date mutual fund flows have slowed, this data doesn’t include CITs, which are quickly becoming more popular vehicles for target-date strategies. We estimate that CITs had about 40% of the target-date market share at the end of 2019, up from less than 20% in 2014. Unlike mutual funds, CIT have negotiable fees, which makes them more attractive for large 401(k) plans. Assets in CITs are voluntarily reported on a lag compared to mutual funds, so year-end data isn’t currently available.

The Top 10 Target-Date Mutual Fund Series for 2020
Exhibit 2 shows the top 10 target-date mutual fund series ranked by net flows and the year-over-year percentage change in net flows.

After more than a decade, a Fidelity target-date series is back on top of the best-sellers list. In 2020, Fidelity Freedom Index’s mutual funds raked in more than $15 billion, more than any other target-date mutual fund series. It’s the first time Vanguard’s Target Retirement series hasn’t held the top spot since 2008 when it took the crown from Fidelity Freedom series, which largely uses active underlying funds.

Fidelity Freedom Index was one of only two series, along with JPMorgan SmartRetirement Blend, that took in more than $1 billion in 2020 and saw flows increase year over year. All other series with more than $1 billion of net inflows saw a decline in net flows relative to 2019. Total net flows into to the top 10 series fell by almost half for the year to $46.6 billion, so there doesn’t appear to be many investor dollars rotating from one mutual fund series to another.

One trend that has remained steady is the demand for index-based target-date strategies. Index-based target-date series took in over $28 billion, or 60%, of the $46 billion total the top 10 hauled in. Target-date fees have increasingly been a lightning rod for 401(k) lawsuits, so it’s not surprising to see the cheapest series getting the most flows. Through the first eight months of 2020, for example, 60 excessive fee lawsuits were filed against 401(k) plans, up from 20 in all of 2019, according to Bloomberg Law.

No Performance Red Flags for Target-Date Funds
Despite the first quarter’s bear market, the average performance of target-date funds in 2020 was strong. Exhibit 3 shows the average Morningstar Target-Date Category returns for 2020.

Exhibit 3: Morningstar Target-Date Category Returns for 2020


  - Source: Morningstar Direct, data as of Dec. 31, 2020

The average Morningstar Category return ranged from more than 15% for vintages furthest from retirement, to just under 10% for those in retirement. Vanguard, which saw the largest drop in contributions, had an average category rank of 41 in 2020 and it topped the average in each category yet still saw flows slow to a trickle. American Funds, which finished second in net contributions for 2020, had an even better year, finishing with an average rank of 21--and it still saw its net inflows chopped in half for the year.

With no smoking gun from poor performance, it’s more likely that the slowdown in flows reflects the very real economic stress and anxiety affecting investors as the COVID-19 pandemic continues into 2021, rather than a lack of interest in target-date strategies as a retirement savings vehicle.

After publication, Exhibit 2 was corrected regarding American Funds' 2020 net flows and percentage change.