As target-date funds become more popular, prospective managers as well as existing managers are facing profit pressure from both peers and lower fee demands by sponsors.
"As the industry continues to mature, certain providers will say, 'Can we compete?'" said Jeff Holt, a Morningstar Inc. director and co-author of the firm's recently published analysis,"2019 Target-Date Fund Landscape."
"It's a struggle for providers to gain market share," said Mr. Holt, especially because three managers — Vanguard Group Inc., Fidelity Investments and T. Rowe Price Group Inc. — owned 69% of the mutual fund-based target-date series market last year.
Adding the next three managers — Capital Group Cos., J.P. Morgan Asset Management and TIAA-CREF — brings the combined market share to 87.4%. That means more than 30 other managers are fighting for the rest of the market. At year-end 2018, Morningstar reported the mutual fund target-date market had $1.09 trillion in assets.
Meanwhile, fees are falling as veteran managers add lower-cost options to their stable of target-date series. Last year, an estimated $57 billion in assets flowed into target-date funds with expense ratios of 20 basis points or less, the Morningstar report said. Target-date funds with expense ratios of 60 basis points or more suffered an estimated $37 billion in outflows.
So it's not surprising to Mr. Holt that some managers have acted accordingly. Between September 2018 and March 2019, five managers announced they were liquidating, merging or mapping their target-date strategies into other investment options. Three others eliminated target-date series in 2017.
Last year, only two mutual-funds target-date series were launched — Fidelity Freedom Blend, by Fidelity, which had seven target-date funds at year-end 2018, and MassMutual Select T. Rowe Price Retirement Funds, by Massachusetts Mutual Life Insurance Co., which had two. The MassMutual series uses T. Rowe Price to provide active management and tactical asset allocation.
Adding more target-date funds by existing managers contributed to the target-date series growth, according to Morningstar. "The providers appear less concerned about cannibalizing their own solutions compared to wanting to participate in the market," Mr. Holt said. In this case, participation often means offering a lower-cost target-date series.
For example, by year-end 2018, the Fidelity Freedom Blend series had a weighted average expense ratio of 44 basis points, lower than four of Fidelity's other target-date series last year, the Morningstar report said. The MassMutual Select T. Rowe Price Retirement Funds, had a weighted average expense ratio of 74 basis points, which is lower than the other MassMutual target-date series.
"When providers offer multiple target-date fund series, investors tend to choose the cheapest one," the Morningstar report said.