Target-date fund asset growth got an obvious boost from a strong equity market in 2013, but additional inflows played a prominent role, said Josh Charlson, senior mutual fund analyst at Morningstar Inc., Chicago.
Morningstar's analysis of target-date fund assets — covering open-end mutual funds and ETF-based funds — showed year-end 2013 assets of $620.8 billion, up 28% from $484.9 billion in 2012. Of the asset growth between those years, Mr. Charlson said 37% was due to inflows and 63% was due to market appreciation.
Noting that some target-date fund managers have raised their equity allocations, Mr. Charlson said managers are “slowly beginning to think about their bond holdings” in anticipation of higher interest rates. Their response could include increasing equity allocations in their glidepaths, reducing bond-portfolio duration and/or using a “more flexible strategy” to include such investments as bank loans and high-yield bonds, he said.
Target-date fund growth is being propelled in part by younger participants in 401(k) plans. The highest target-date participation in 401(k) plans belongs to people in their 20s, according to data compiled by the Investment Company Institute and the Employee Benefit Research Institute.
In 2012, the most recent available data, 52% of participants in their 20s invested in target-date funds compared to 37% of participants in their 50s and 34% of those in their 60s.
Overall, 41% of all participants invested in target-date funds in 2012, up from 39% in 2011 and 19% in 2006, according to the ICI/EBRI research.
The percentage of assets invested in target-date funds in 2012 follows the same age trend as participation rates. Among the 20s group, 34% of their 401(k) assets were invested in target-date funds; among those in their 50s and 60s, target-date funds represented 13% of their 401(k) assets.
Overall, target-date funds accounted for 15% of 401(k) assets in 2012 vs. 13% in 2011 and 5% in 2006, the ICI/EBRI research showed.