Morningstar recently released its annual report on target-date funds, which are among the fastest-growing investments for workers saving for retirement. There are encouraging signs that investors are embracing these funds, they appear to be well-suited for the purpose and the funds often serve as key lifelines to asset managers’ bottom lines. It would appear that target date funds are the making of a “perfect storm” for the retirement industry.
Lower Expenses
Target-date fund expense ratios fell to 73 basis points in 2015 on an asset-weighted basis, down from 78 basis points the previous year, the seventh consecutive year the ratio has declined, said the latest annual survey of target-date funds published Tuesday by financial research firm Morningstar.
The gradual decline in target-date fund expense ratios over the past seven years — the average asset-weighted expense ratio was 104 basis points in 2008 — is due in part to a very competitive landscape and more calls by investors for lower costs, said Jeff Holt, associate director at Morningstar, in a telephone interview.
Still Dominated By Top Three Firms
Although competition is growing, According to PIOnline (requires registration), the three firms that have commanded the lion’s share of the market in the past — Fidelity Investments, T. Rowe Price Group and Vanguard Group — continue to do so. However, their combined market share continues to decline slightly, to 70.6% of target-date mutual fund assets at the end of 2015, down from 71.2% the previous year. In 2009, their market share was 77.1%.
Target-Date Funds Fueled by Success/Flows
Target-date funds continued their multiyear growth trend in 2015 with an all-time high of $69 billion in positive net flows. Assets in target-date mutual funds grew to more than $763 billion by the end of 2015, up from $706 billion at year-end 2014. For firms with established target-date offerings, these funds often play a meaningful role in their business success. Exhibit 2 shows that of the 10 largest target-date mutual fund companies, target-date funds account for at least an estimated 20% of the mutual fund assets for T. Rowe Price, Principal, and TIAA-CREF.
