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Target-date funds continue downward fee trend in 2016; assets rise 15%

Vanguard sees market share increase to 31.8%

Target-date fund expense ratios fell to 71 basis points in 2016 on an asset-weighted basis, down from 73 basis points in 2015, making it the eighth consecutive year the ratio has declined, said Morningstar's latest annual survey of target-date funds published Thursday.

“Even though the U.S. Department of Labor's fiduciary rule remains in limbo, a flurry of lawsuits brought against plan sponsors alleging excess fees in defined contribution retirement plans have elevated attention to fees,” the report's authors wrote. “Concurrently, the general preference for passive investing continues to grow, thereby spurring active managers to bring down costs to stay competitive.”

The report, which also looks at individual target-date managers, found that Fidelity Investments, T. Rowe Price Group and Vanguard Group continue to manage the lion's share of target-date mutual fund assets. Their combined market share was 70.5% at the end of 2016, relatively flat with the 70.6% share at the end of 2015. Vanguard, the largest provider last year, saw its 2016 market share increase 2.3 percentage points to 31.8%. Fidelity and T. Rowe Price's market share declined 1.9 percentage points and 0.5 percentage points, respectively, to 21.9% and 16.8%.

Overall, target-date mutual fund assets rose to a record roughly $880 billion at the end of 2016, up 15% from $763 billion at the end of 2015, driven in part by an estimated $59 billion in net inflows (vs. $69 billion in 2015). Passive series saw more than $50 billion in estimated inflows compared to $23 billion for active series.

Other findings from the report include:

  • 12 firms offered more than one target-date series by the end of 2016. Ten years ago, no firm offered more than one series.

  • Alternative investments have gained minimal traction in target-date funds, which Morningstar contributed in part to their generally higher fees.
  • Nuveen is the only firm that currently includes private real estate in a mutual fund target-date series.

Morningstar's survey counts mutual fund and exchange-traded fund versions of target-date funds but excludes collective trusts. The Morningstar target-date universe includes assets in retirement accounts and in taxable accounts.