Because of their simplicity and the desire by most 40k and 403b investors to delegate portfolio construction and management, target date funds (TDFs) have grown to almost $800 billion gathering 60-70% of new contributions in corporate retirement plans. Prices have plummeted with Charles Schwab recently announcing a new suite of funds at 8 basis points or 0.08%.
Overall TDF prices have shrunk by 33% from 2009 to the end of 2015 according to Morningstar and, Vanguard, known for low fees using index funds, has taken over the top spot in the TDF race over Fidelity and T Rowe Price, both known for active management. The new Schwab TDFs rely on cheap ETFs (exchange traded funds) which track markets rather than try to beat them. New flows into index or passive funds have significantly outpaced more expensive actively managed investments overall. And rather than layering on fees to manage TDFs, managers eager to get a piece of these popular funds, are willing to sacrifice price.
Also significant in the Schwab announcement is the lack of any asset minimum perhaps in reaction to start-up robo record keepers focused on small plans using ETF target date and professionally managed investments.
But some experts point out that there is no such thing as a passive TDF as the portfolio manager has to make certain decisions like the glide path which affects how much risk the fund takes as investors gets close to retirement age. Just because ETFs and other index funds track a market does not mean that they are immune to loss. If the market tanks, so does the index fund and the TDF that relies on them. Some critics of indexing point out that while these passive investments may be good for bull markets, when markets pull back like in 2008-09, active managers are able to soften the fall by moving into less risky investments.
Regardless, the beat goes on for TDF also growing because of their popularity as 401k and 403b default investments (QDIA) especially with more plans employing auto-enrollment and, along with their growth, the prices seem to be plummeting with the latest salvo fired by Charles Schwab.
