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4 Things to Consider About Passive Target-Date Funds

Key findings from Morningstar’s Target-Date Fund Landscape report

Jeff Holt, Morningstar Research Services LLC

 

Assets in target-date mutual funds surpassed $1 trillion in 2017, but even more stunning for the year was investors’ flight to target-date series that own mostly passively managed index funds.

Of the record-high $70 billion that flowed into target-date funds in 2017, 95% went to passive target-date funds as there appears a healthy appetite for lower-cost offerings. And to meet the lower-cost demand, many target-date providers have become more inclined to launch additional, lower-cost series that have generally been more popular than their legacy offerings.

In our latest report, we highlighted noteworthy considerations for those choosing between active and passive target-date funds. Here are four of them:

  1. The distinction between active and passive target-date series has become murkier. While fees for target-date funds continued their multiyear decline in 2017, the injection of more passive exposure within historically active target-date series and the launch of series that blend active and passive funds has contributed to that trend. The mix of active and passive underlying funds should be considered when determining the attractiveness of a target-date series' fees. 
  2. There’s no such thing as a truly passive portfolio for target-date funds. Looking at sub-asset-class glide paths, passive target-date series were actually more different from one another than active ones; and they were most different in funds near their target retirement date, when investor balances can be expected to be near their peak. This reinforces the notion that no target-date series is truly passively managed, as every target-date manager makes active decisions in designing a glide path and selecting asset classes.
  3. Target-date managers appear to have less conviction in their passive series. When target-date managers run multiple series, they almost always personally invest more frequently—and in higher amounts—in their older, pricier series than the newer, cheaper one. Not a single target-date manager has more than $1 million invested in a passive target-date series, whereas 13 target-date managers have at least that much in an active series.      
  4. Investors haven’t consistently been better off by moving to the lower-cost offering. While multiple target-date providers have launched lower-cost series to meet investor demand, those series' performance results have lagged the older, more-costly ones in several instances.

Target-date funds continue to play an increasing role in helping investors reach their retirement goals by serving as a common default investment in defined-contribution retirement plans. This year's report also covers other developments in the competitive landscape and highlights noteworthy considerations for target-date investors in five areas: Price, Performance, Parent, People, and Process.

Please see below for important disclosure. 

Download the full version of Morningstar’s 2018 Target-Date Fund Landscape report.

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Important Disclosure

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

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