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For 401(k) Investors, Good News on TDF Returns, Fees

Morningstar’s 2015 Target-Date Fund Landscape report is out — and the news is good for retirement savings plans. 

The report notes that the annualized asset-weighted investor return over the 10 years ending in December 2014 stood at 6.1%, 1.1 percentage points higher than the typical target-date fund’s 5.0% gain. Morningstar attributes the gap to the discipline inherent in regularly setting aside a portion of each paycheck into retirement savings accounts — the predominant means of investing in these funds. 

While growth of target-date mutual funds has continued to slow, on average, TDFs accounted for more than 30% of the net new inflows to their respective fund firms in 2014. All told, TDFs made up approximately 8% of those firms’ total mutual fund assets as of December 2014, according to the report. 

Target-date mutual fund assets grew to $706 billion by Dec. 31, 2014, with investors adding $49 billion in net new monies into the funds last year (an 8% organic growth rate). Of the 40 or so firms offering target-date mutual funds, only seven saw net outflows from those funds last year.

Vanguard became the industry’s largest target-date mutual fund provider in July 2014, unseating Fidelity from its 16-year reign. Together with T. Rowe Price, the three managers account for 71% of the industry’s target-date fund assets, according to the report. 

Morningstar notes that rising markets brought gains to every TDF in 2014, though more-diversified series — particularly ones with an international bent — tended to fall behind their peers. Index-based target-date series showed a performance edge over their actively managed peers in 2014 and the past decade, reflecting fee advantages and, in some cases, above-average exposure to U.S. stocks, according to Morningstar.

The average TDF investor paid lower fees for the sixth year in a row, as the asset-weighted expense ratio of target-date funds slipped to 0.78% in 2014 from 0.84% the previous year.