Morningstar: Target Date Fund Fees Decline for 9th Year Running; Passive Rules

Morningstar: Target Date Fund Fees Decline for 9th Year Running; Passive Rules. Is the migration to passive target date fund (TDF) strategies driving down fees across the board?

Findings from Morningstar’s latest annual survey of target date funds, cited in InvestmentNews, seem to bear this out. According to Morningstar, target date fund fees have declined for the ninth year in a row, and a majority of last year’s record inflows went to passive TDF strategies.

Specifically, the average asset-weighted expense ratio for a target date mutual fund series fell to 66 basis points in 2017, down 5 basis points from 2016, and 37 basis points from 2009.

Moreover, 2017 was a record year for TDF inflows, weighing in at an estimated $70 billion, vs. $59 billion in 2016. Nearly 95%, or $67 billion of the estimated net inflows went to passive TDFs. Total TDF assets came in at a whopping $1.1 trillion at year-end 2017, up 26.1% from the prior year. TDFs also posted record positive investment returns — with average returns ranging from 8.8% to 21.3%.

The majority of TDF assets continue to flow to three providers: Vanguard, Fidelity and T. Rowe Price. Combined, their market share was nearly 70% at year-end 2017, more or less flat from the previous year. Vanguard’s market share climbed 2.6 percentage points to 34.4% in 2017.

The Morningstar data indicates a continued rising demand among retirement plans for lower-cost, passive target date strategies. Essentially, passive strategies track a market-weighed index or portfolio. Since 2015, Morningstar found, net inflows into passive target date series have exceeded those for active strategies. This migration to passively managed strategies is consistent with trends that have prevailed among both individual retail investors and retirement plans in recent years — a phenomenon The Wall Street Journal dubbed “Wall Street’s Do-Nothing Investment Revolution.”

Striking a balance between fees and performance can be tricky. While lower-cost, passive TDFs continue to capture the lion’s share of assets, plan sponsors would do well to ensure they are getting the most bang for their plan dollars. Not all new, lower-cost TDFs perform better than their older, more costly counterparts. While sponsors have a fiduciary responsibility to keep fees “reasonable,” perhaps more important is ensuring TDF returns are consistent with the plan’s performance criteria as outlined in your investment policy statement (IPS).

Robyn Kurdek

Robyn Kurdek

Freelance writer with nearly 2 decades of financial industry experience, with niche expertise in the defined contribution (DC) industry. I also have defined benefit (DB) plan knowledge. I write all types of content for retirement plan participants, sponsors and advisors, including web copy, newsletters, white papers, fact sheets, blog posts, financial wellness articles, and more. "I speak DC."
Robyn Kurdek
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