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A Brief Overview of How the Target-Date Fund Landscape is Evolving

5 takeaways from Morningstar’s latest report on target-date strategies

Jeff Holt, Morningstar Research Services LLC

Target-date strategies saw another year of strong flows from investors, lifting assets in target-date mutual funds and target-date collective investment trusts to more than $1.7 trillion at year-end 2018.

Target-date strategies often serve as the default investment option in many Americans’ defined-contribution retirement plans. The persistent growth and massive amount of assets mean that target-date strategies are playing a key role in helping meet the retirement goals of more and more investors.

In our latest report, we cover how investor demand for target-date strategies is evolving and how target-date providers have responded.

5 takeaways from Morningstar’s 2019 Target-Date Fund Landscape report

  1. Price is driving popularity. Of the estimated net $55 billion investors placed in target-date mutual funds in 2018, $57 billion went to funds with expense ratios less than or equal to 0.20%. Meanwhile, funds with expense ratios higher than 0.60% saw approximately $37 billion leave during the year.
  2. Target-date providers are responding to the demand for lower-cost options. In recent years, many providers have cut costs, launched cheaper alternatives, and made their strategies available in lower-cost vehicles like CITs. Eight of the 10 largest target-date providers by total target-date assets offered their strategy through both mutual fund and CIT vehicles at year-end 2018.
  3. Target-date funds that hold mostly index funds appear poised to take the lead. Target-date fund series that held more than 80% of assets in index funds captured nearly all of the $55 billion estimated net flow to target-date mutual funds in 2018. If recent trends hold, assets in series that invest predominantly in index funds (roughly $480 billion) could overtake series that hold mainly active funds (roughly $570 billion) within a couple of years.
  4. Target-date CITs are thriving. Assets in target-date CITs grew by approximately $30 billion to over $660 billion in 2018 when assets in target-date mutual funds declined to $1.09 trillion from $1.11 trillion. Of the largest target-date providers, both Fidelity and T. Rowe Price saw positive net inflows to target-date CITs in 2018, while also experiencing net outflows from their target-date mutual funds.
  5. Vanguard is dominating the market. The firm's roughly $650 billion in total target-date assets at year-end 2018 accounted for nearly 40% market share, dwarfing the 15% market share of its next-closest competitor. In addition to its market-leading $40 billion in estimated target-date fund net inflows in 2018, Vanguard also saw roughly $28 billion in CIT net inflows.

In addition to exploring key trends in the competitive landscape, this year’s report highlights noteworthy considerations in five areas: Price, Performance, Parent, People, and Process. It also previews a few of the new data points and exhibits that will become fixtures of the enhanced Morningstar's Target-Date Fund Series Reports set to launch in June 2019.

For more of Morningstar's analysis of the trends driving today's target-date funds, take a look at the webinar, " Target-Date Fund Landscape: Simplifying the Complex."

For more about the trends driving today’s target-date strategies, download the full report.
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