Defined contribution plan assets invested in target-date funds rose 8.6% to $74.9 billion in the 12 months ended Sept. 30, Pensions & Investments' annual survey of the largest retirement plans shows.
Industry experts say that growth should continue thanks to, among other things, the continuing impact of the Pension Protection Act of 2006 and the changing of plan designs.
“This is one of the few (investment) areas getting consistent growth over the last few years,” said Joshua Charlson, senior mutual fund analyst at Morningstar Inc., Chicago. “There's a desire of sponsors to have employees in relatively safer, stable investments.”
Mr. Charlson expects target-date fund assets will continue to increase, although yearly aggregate growth rates gradually will slow as the market becomes more saturated with target-date offerings.
“By and large, I think target-date funds have recovered from 2008 regarding their reputation,” said David O'Meara, a New York-based senior investment consultant for Towers Watson & Co.
(The 2008 stock market plunge's impact on target-date funds, especially those with heavy equity allocations for people nearing retirement, provoked government hearings on the funds' structure, management and marketing.)
“They're not perfect, but they do a good job of providing participants with an appropriate investment at an appropriate time,” Mr. O'Meara said.
The PPA stimulated use of target-date funds because they can be used as a qualified default investment alternative.
“As plans add target-date funds, most plans are making them QDIA,” said Toni Brown, the San Francisco-based director of U.S. client consulting and head of U.S. defined contribution for Mercer LLC.
Plan executives' increased use of auto enrollment has accelerated the use of QDIAs, and re-enrollment also “will drive more assets” to target-date funds, Ms. Brown said.
In the P&I survey, plan executives were asked to identify their QDIA. Of the 48 who responded to the question, 38 cited target-date funds while eight mentioned balanced funds and two, managed accounts.
“There's definitely been a movement from the balanced funds to target funds,” said Mr. Charlson.
For the broad target-date market, Morningstar counted total assets of $378.5 billion as of Dec. 31, excluding assets of custom target-date funds. The average return for the 386 target-date funds tracked by Morningstar was -1.6% last year. The S&P 500 index was up 2.1%.
Morningstar calculated the aggregate asset organic growth rate - which excludes market appreciation - at 15.8% in 2011. Aggregate organic growth rates for 2010 and 2009 were 22.1% and 38.7%, respectively. Even during the depths of the economic turmoil in 2008, the organic growth rate for that year was 33.4%, according to Morningstar.