Target-date fund expense ratios fell to 73 basis points in 2015 on an asset-weighted basis, down from 78 basis points the previous year, the seventh consecutive year the ratio has declined, said the latest annual survey of target-date funds published Tuesday by financial research firm Morningstar.
The gradual decline in target-date fund expense ratios over the past seven years — the average asset-weighted expense ratio was 104 basis points in 2008 — is due in part to a very competitive landscape and more calls by investors for lower costs, said Jeff Holt, associate director at Morningstar, in a telephone interview.
Also, there is a greater sensitivity on the part of 401(k) plan sponsors regarding costs.
“A lot of the more expensive strategies have fallen by the wayside,” Mr. Holt said. “Generally, costs have come down, and it makes sense with the regulatory landscape with all the lawsuits involving fees and this being the default investment in a lot of 401(k) plans that plan sponsors are going to be very sensitive about costs.”
The demand by plan sponsors has led to more competitive pricing in general, also related to new providers entering the market charging lower fees.
Still, the three firms that have commanded the lion’s share of the market in the past — Fidelity Investments, T. Rowe Price Group and Vanguard Group — continue to do so. However, their combined market share continues to decline slightly, to 70.6% of target-date mutual fund assets at the end of 2015, down from 71.2% the previous year. In 2009, their market share was 77.1%.
Vanguard Group, the leader, actually saw its market share increase to 29.5%, from 27.3% in 2014, while Fidelity’s market share dropped to 23.8% from 26.6%, and T. Rowe Price’s share remained flat at 17.3%.
Overall assets saw organic growth of about $69 billion in positive net flows, to bring the total to about $763 billion, Mr. Holt said. It is a record high total, up 8% from the end of 2014.
Organic growth reflects inflows, but it excludes market appreciation.
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.
