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TDFs Top Trillion Dollar Mark

Assets in target-date mutual funds totaled roughly $1.11 trillion at the end of 2017, up from $880 billion at year-end 2016 – but that’s not the most intriguing trend.

According to Morningstar’s “2018 Target-Date Fund Landscape,” nearly 95% of the $70 billion estimated net flows to TDFs in 2017 went to target-date series that invest predominantly — i.e., at least 80% of assets — in index funds.

It’s a trend that Morningstar says started in 2015 when passive target-date series’ net flows exceeded those for active ones. Not that the underlying reliance on index funds means that the TDFs are truly “passive” in that, as the report’s authors acknowledge, every target-date manager makes active decisions in building a glide path and selecting asset classes.

While active series still have more assets, passive series accounted for 42% of TDF assets at the end of 2017, up from 35% in 2014 and 24% in 2008.

However, the increasing reliance on indexed funds may be contributing to lower fees for TDFs. Morningstar notes that fees for TDFs continued their multiyear downward trend in 2017, and that the average asset-weighted expense ratio fell to 0.66% at the end of 2017, a notable decrease from 0.91% just five years earlier.

Flow Growth

While TDFs continue to see strong growth each year, those flows are favoring a handful of firms. Not surprisingly, with a growing emphasis on fees, Vanguard has been the big winner of new investments in recent years, attracting $50.6 billion in estimated net inflows in 2017, bringing its total TDF assets to an industry-leading $381 billion. To put that in context, Morningstar explains that Vanguard’s 2017 net flows exceeded the sixth-largest provider’s total assets in TDFs.

American Funds' $24.1 billion in 2017 estimated net flows came in a distant second, but still represented a strong year, with the firm’s $88 billion TDF assets making it the fourth-largest provider.

In fact, the report notes that only three other firms saw more than $1 billion in estimated net flows to their target-date mutual funds in 2017:

  • TIAA Investments ($6.1 billion)

  • BlackRock ($4.6 billion)

  • State Street Global Advisors ($2.7 billion)

The report notes that TDFs now account for approximately one third of TIAA Investments mutual fund assets, and represent more than 40% of State Street Global Advisors’ mutual fund assets.

‘Out’ Takes

That said, 17 of 41 firms experienced negative net flows from their TDFs in 2017, including four that saw more than $1 billion leave:

  • Rowe Price (which explains that clients’ transition from its mutual fund version to the collective investment trust version has contributed to the $9.5 billion outflow)

  • Wells Fargo (roughly negative $4.7 billion in estimated flows in 2017)

  • Principal (negative $3.5 billion)

  • John Hancock (negative $1.5 billion)

The report notes that the “Big Three” — Vanguard, Fidelity and T. Rowe Price — have long been the dominant players in the TDF space, but their collective market share has edged down to 70% from 75% five years ago. However, the five largest providers — Vanguard (34%), Fidelity (20%), T. Rowe (15%), American Funds (8%) and JP Morgan (4.8%) — held nearly 83% of the market share at year-end 2017.

(Still) Going Strong

Indeed, Morningstar notes that industry assets amounted to only $158 billion at the end of 2008. The growth is systemic and organic; in 2017 the asset growth came from the combination of positive returns — the average return for TDF Morningstar Categories ranged from 8.8% to 21.3% — and positive flows from investors. Regarding the latter, the estimated $70 billion of net flows that went to TDFs in 2017 edged the previous high of $69 billion set in 2015 and represented a notable increase from $59 billion in 2016. The net flows have been consistently strong, exceeding more than $40 billion each year since 2008.

By demographic — or, perhaps more precisely, by target date — the 2025 category's $13 billion in net flows in 2017 was the largest. On the other hand, the comparatively modest $2 billion net flows in 2017 for the target-date 2060+ category comes from investors in early in their careers (who typically earn and contribute less).

The report acknowledges that the categories that have passed their target retirement date can expect net outflows, though it’s unclear whether these TDF investors gradually withdraw assets for retirement income or move assets in a lump sum to another strategy once they reach retirement.