Fueled by a surge in stock prices, assets in target-date mutual funds and CITs hit new highs in 2019, according to an annual study by Sway Research.
In fact, target-date assets reached $2.3 trillion by year-end, after beginning the year with $1.77 trillion, Sway reports in “The State of the Target-Date Market: 2020.”
The 30% rise in assets was mostly the result of the growth in stock prices, as the S&P 500 Index gained 30% for the year. At year-end 2019, two in five dollars (40%) invested in a non-custom TD solution were invested in a CIT-based solution, up from only 32% at the end of 2015.
In what may come as no surprise, the Vanguard Group may manage more than $1 trillion in TD assets by the end of 2020, barring an ongoing stock market decline, the study notes. The firm managed $862 billion of TD assets at the end of 2019—a rise of 33% from $649 billion in 2018 and up from $356 billion at the end of 2015. The study further reports that the firm controlled 38% of assets in non-custom TD solutions to start 2020, up from 32% at the end of 2016.
Coming in second place was Fidelity, which controlled $310 billion to start the year, while T. Rowe Price is in third position with $282 billion of TD AUM. Vanguard also leads in TD solutions that invest in passively managed underlying investments, controlling 68% of that market segment.
Vanguard is an example of a firm that offers both asset management and recordkeeping services to DC plans, Sway observes. Firms that bundle asset management and DC plan recordkeeping are dominating the TD market, and now control 85% of assets in non-custom TD products, up from 83% in 2015.
By comparison, asset share of pure asset managers is declining and is now just 14%, down from 15% in 2015. That said, while recordkeeping may not be a highly profitable business, Sway notes that asset management still is—even if margins are declining—and the benefits of having both a major recordkeeping platform and an asset management arm are clearly visible in the TD market.
TD Convergence
Since 2015, when Sway began tracking asset growth across mutual fund- and CIT-based TD solutions, the concentration of assets in a handful of providers has increased. The share of assets controlled by Vanguard and the other nine providers in the top 10 has increased from 89.6% to 92.5% in just four years. This leaves just 7.5% of the market—$171 billion of AUM—to be split among the other 53 providers currently offering non-custom TD solutions, the study observes.
Fees Fall Again
The fees paid by an average TD investor continue to fall. On an asset-weighted basis, the average expense ratio of a mutual fund-based TD series that invests in actively managed underlying investments fell to 65 basis points (BPs) in 2019, down from 67 BPs in 2018 and 71 BPs in 2017, the first year Sway produced this analysis.
The average asset-weighted expense ratio of mutual fund-based hybrid TD series—those that invest in both active and passive underlying funds—dropped to 51 BPs from 55 BPs a year earlier. Sway says that it’s important to note, however, that the average was only 48 BPs in 2017, before a number of active series switched to a hybrid approach and drove average costs up. The asset-weighted expense ratio of the average TD series that invests in passive underlying funds is just 13 BPs—the same level as in 2018, but down from 15 BPs at the end of 2017.
Sway’s annual study of the TD market is based on a proprietary database of mutual fund and collective investment trust TD portfolio and asset data, which includes nearly 170 different TD series across more than 6,000 individual mutual fund share classes and CITs.
