Target date funds (TDFs), the most ubiquitous offerings in defined contribution plans, are engineered to automatically receive and invest the contributions of masses of retirement savers. TDFs serve as a plan’s Qualifying Default Investment Alternative (QDIAs), and assets in target date vehicles have sky-rocketed over the last decade to $3.5 trillion at 2023 year-end from just $621 billion ten years ago. 2023 was a positive year for investors in TDFs. After the substantial market correction in 2022, last year’s rebounding stock market set the stage for record-high inflows totaling $156 billion.
Fortunately, target date investors appear to be utilizing the strategies as designed. Investors largely stayed the course through the market downturn in 2022, thus paving the way to benefit from the market rebound in 2023.
Collective Investment Trusts
Collective Investment Trusts (CITs), pooled investment vehicles operated by a bank or trust company for use in ERISA plans, have established themselves as the dominant offering for target date vehicles. The appeal of CITs is justified. Assets in CITs continue to gain momentum. The ongoing adoption of CITs as a preferred investment vehicle for TDFs is evidence of the large market share they have attained. Furthermore, mutual fund-to-CIT conversions have continued, signaling the growing recognition that CIT options are often the more desirable option. Throughout the last two years, over $77 billion in target date mutual funds have been converted to CITs.
In 2022, CITs dominated cash flows into TDFs with $121 billion or 79% of the $153 billion of inflows into target date products. According to a recent report, since 2020, CITs have attracted most of the incoming assets to TDFs, with approximately $104.5 billion in 2023, a full 67% of the $156 billion of assets that poured into target date strategies last year. The increasing market share of CITs shows no sign of waning, with CITs having reached a 49% total market share of target date vehicles at 2023’s year-end, up 40% from just five years ago. Target date CITs are anticipated to continue their momentum and are expected to supplant mutual funds as the most popular target date vehicle by assets by the end of 2024.
While offering similar benefits to mutual funds at generally lower costs, CITs provide an attractive option for fiduciaries to fulfill their continual duty to monitor investments and fees for the best value. Investment trusts can cost significantly less than the mutual funds that they are often modeled after.
Fees
Plan fees in all variations have been a principal fiduciary concern over the last few decades. While plan sponsors have coveted lower-cost TDF share classes and CITs, asset managers have responded by cutting fees. The average expense ratio for TDFs dropped 4.6% to 30 in 2023 from 32 basis points the year before. Overall, expenses have dropped by nearly half in the last decade, declining by an average of 6.2% annually.
In 2023, TDFs in the lowest fifth in terms of expenses saw substantial inflows totaling over $80 billion. In comparison, the TDFs with expenses above the lowest 20% saw net outflows of over $28 billion. Similar flows into the lowest cost and out of the higher cost options occurred in 2022.
With the plan fee reduction movement showing no signs of waning, even a small pricing advantage can have a significant impact on returns on a participant’s lifetime savings.
Product Manufacturers
The five fund managers with the largest share of TDF assets are Vanguard, T. Rowe Price, BlackRock, Fidelity, and American Funds. In total, they hold approximately 80% of the TDF market and have mixed splits between mutual fund assets and CIT assets. Vanguard Target Retirement collected the most net new money in 2022 when accounting for both mutual fund and CIT flows. At the end of 2022, 51% of Vanguard’s target-date assets were in CITs, marking the first-time investment trusts surpassed mutual funds in assets.
Asset managers have rounded out their product offerings by launching multiple series that have the same equity glide path but use all active funds, all passive funds, or a mix of both, and even various TDF offerings from the same shop. After reviewing long-term performance trends, returns after fees are largely similar to one another despite the differences in underlying funds.
Regulation
The Department of Labor (DOL) developed TDF guidance for plan sponsors back in 2013 (Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries). A study conducted in March of this year by the Government Accountability Office (GAO) concluded that the DOL should update its TDF guidance to plan sponsors on how to monitor and select investment products. The GAO report recommended that the DOL provide updates to reflect recent product development, including the use of CITs and the differences between “to” and “through” glide paths. The call for updated DOL guidance demonstrates that TDFs are continually evolving, which highlights the importance of continually heavy monitoring of the investment vehicles. Newly updated guidance will not only have an impact on employee investment outcomes but also have broad implications for plan fiduciaries.
TDFs were designed to be a simplified and clear investment strategy for retirement investors by automatically adjusting their asset allocation mix to become more conservative as the target date approaches, and beyond. Low fees, QDIA status, and research-driven product development continue to make target date strategies a great tool for most do-it-for-me investors to save for retirement.
Spring 2024 Fiduciary Commentary
Target Date Fund Market Review
Target date funds (TDFs), the most ubiquitous offerings in defined contribution plans, are engineered to automatically receive and invest the contributions of masses of retirement savers. TDFs serve as a plan’s Qualifying Default Investment Alternative (QDIAs), and assets in target date vehicles have sky-rocketed over the last decade to $3.5 trillion at 2023 year-end from just $621 billion ten years ago. 2023 was a positive year for investors in TDFs. After the substantial market correction in 2022, last year’s rebounding stock market set the stage for record-high inflows totaling $156 billion.
Fortunately, target date investors appear to be utilizing the strategies as designed. Investors largely stayed the course through the market downturn in 2022, thus paving the way to benefit from the market rebound in 2023.
Collective Investment Trusts
Collective Investment Trusts (CITs), pooled investment vehicles operated by a bank or trust company for use in ERISA plans, have established themselves as the dominant offering for target date vehicles. The appeal of CITs is justified. Assets in CITs continue to gain momentum. The ongoing adoption of CITs as a preferred investment vehicle for TDFs is evidence of the large market share they have attained. Furthermore, mutual fund-to-CIT conversions have continued, signaling the growing recognition that CIT options are often the more desirable option. Throughout the last two years, over $77 billion in target date mutual funds have been converted to CITs.
In 2022, CITs dominated cash flows into TDFs with $121 billion or 79% of the $153 billion of inflows into target date products. According to a recent report, since 2020, CITs have attracted most of the incoming assets to TDFs, with approximately $104.5 billion in 2023, a full 67% of the $156 billion of assets that poured into target date strategies last year. The increasing market share of CITs shows no sign of waning, with CITs having reached a 49% total market share of target date vehicles at 2023’s year-end, up 40% from just five years ago. Target date CITs are anticipated to continue their momentum and are expected to supplant mutual funds as the most popular target date vehicle by assets by the end of 2024.
While offering similar benefits to mutual funds at generally lower costs, CITs provide an attractive option for fiduciaries to fulfill their continual duty to monitor investments and fees for the best value. Investment trusts can cost significantly less than the mutual funds that they are often modeled after.
Fees
Plan fees in all variations have been a principal fiduciary concern over the last few decades. While plan sponsors have coveted lower-cost TDF share classes and CITs, asset managers have responded by cutting fees. The average expense ratio for TDFs dropped 4.6% to 30 in 2023 from 32 basis points the year before. Overall, expenses have dropped by nearly half in the last decade, declining by an average of 6.2% annually.
In 2023, TDFs in the lowest fifth in terms of expenses saw substantial inflows totaling over $80 billion. In comparison, the TDFs with expenses above the lowest 20% saw net outflows of over $28 billion. Similar flows into the lowest cost and out of the higher cost options occurred in 2022.
With the plan fee reduction movement showing no signs of waning, even a small pricing advantage can have a significant impact on returns on a participant’s lifetime savings.
Product Manufacturers
The five fund managers with the largest share of TDF assets are Vanguard, T. Rowe Price, BlackRock, Fidelity, and American Funds. In total, they hold approximately 80% of the TDF market and have mixed splits between mutual fund assets and CIT assets. Vanguard Target Retirement collected the most net new money in 2022 when accounting for both mutual fund and CIT flows. At the end of 2022, 51% of Vanguard’s target-date assets were in CITs, marking the first-time investment trusts surpassed mutual funds in assets.
Asset managers have rounded out their product offerings by launching multiple series that have the same equity glide path but use all active funds, all passive funds, or a mix of both, and even various TDF offerings from the same shop. After reviewing long-term performance trends, returns after fees are largely similar to one another despite the differences in underlying funds.
Regulation
The Department of Labor (DOL) developed TDF guidance for plan sponsors back in 2013 (Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries). A study conducted in March of this year by the Government Accountability Office (GAO) concluded that the DOL should update its TDF guidance to plan sponsors on how to monitor and select investment products. The GAO report recommended that the DOL provide updates to reflect recent product development, including the use of CITs and the differences between “to” and “through” glide paths. The call for updated DOL guidance demonstrates that TDFs are continually evolving, which highlights the importance of continually heavy monitoring of the investment vehicles. Newly updated guidance will not only have an impact on employee investment outcomes but also have broad implications for plan fiduciaries.
TDFs were designed to be a simplified and clear investment strategy for retirement investors by automatically adjusting their asset allocation mix to become more conservative as the target date approaches, and beyond. Low fees, QDIA status, and research-driven product development continue to make target date strategies a great tool for most do-it-for-me investors to save for retirement.
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