Investor contributions to target-date mutual funds made a comeback in 2021 after the retirement savings vehicles encountered net redemptions for the first time in 2020, according to a new analysis by the firm.
During 2021, net flows into TD mutual funds totaled about $24 billion, up from net outflows of $7.2 billion in 2020. Despite this rebound, however, net contributions were still down from their peak of $69.9 billion in 2017 and less than half of the $59.8 billion of net flows in 2019, the Morningstar analysis shows.
“The economic angst caused by the coronavirus pandemic led to an uptick in hardship withdrawals and a slowdown in contributions in 2020,” writes analyst Megan Pacholok. “In 2021, plan sponsors at defined-contribution plans have continued to accelerate their shift from mutual funds to collective investment trusts, particularly when it comes to target-date funds.”
Pacholok observes that CITs typically cost less than their mutual fund counterparts and some providers are willing to negotiate fees even lower. And as plan sponsors have zeroed in on costs, it’s propelled CIT growth. In fact, at the end of 2020, about 43% of TD assets were in CITs—up from less than 20% in 2014, according to the analysis. The Morningstar analyst notes that because assets and flows into CITs are voluntarily reported, usually on a lag compared with the more regulated mutual funds, year-end CIT data for the TD universe is currently unavailable.
Leading the Way
Meanwhile, for the second year in a row, Fidelity Freedom Index Series took in the most flows among TD mutual funds. In 2021, the series grabbed $26 billion of assets, up 66% from 2020. This comes as the firm reduced the minimum investment on its institutional share class to $5 million from $100 million at the end of 2020, Morningstar notes.
Fidelity also is the only provider to have two series on the list, as Fidelity Freedom Blend had net flows of $3.3 billion, enough to land the fifth spot among the top 10 TD mutual fund series ranked by net flows.
American Funds Target Date Retirement Series continued to hold the No. 2 spot, which it has since 2016. According to the analysis, it is one of two series in the top 10 that invests in all active underlying funds, with the other being T. Rowe Price Target Series landing at No. 10.
TD series with all active funds have been losing market share to index-based and blend series largely because of their higher fees, but American Funds continues to be the exception owing to its strong performance, the analysis notes. Over the past 10 years, the series on average has delivered higher returns than roughly 97% of its peers.
Unlike many other TD series, Vanguard Target Retirement did not see a rebound in flows to its mutual funds in 2021. Though it remains the largest mutual fund series with $660 billion in assets, it received only $71 million of net flows, down from $2.7 billion in 2020, the Morningstar analysis shows. What’s more, 2021 marks the second year in a row the series failed to hold the top flow spot, which it previously held from 2008 through 2019.
Shift to CITs
Still, Vanguard’s TD mutual fund flow data does not tell the full story, as the series serves as an example of the growing popularity of TD CITs, notes Pacholok. For the second year in a row, a majority of inflows to Vanguard’s TD series went to its CITs, not its mutual funds, she observes.
In fact, Vanguard reported investor net contributions amounting to about $55 billion to its CIT TD strategy, accounting for nearly all (99.9%) of the series’ total net flows for the year, up from 86% in 2020. Moreover, its 2021 CIT flows outpaced the combined total of Fidelity Freedom Index’s and American Funds Target Retirement Series’ mutual fund flows.