Target-date funds see assets climb in 2020 despite pandemic – Morningstar

Assets in target-date funds rose to an estimated $2.8 trillion last year vs. $2.3 trillion in 2019, even though participant contributions dropped sharply, according to a Morningstar report.

Market appreciation drove about 90% of the target-date growth, said Morningstar's annual target date series report, issued Thursday.

"We estimate investors contributed a net $52.3 billion to target-date strategies, with CITs taking in approximately $59 billion and mutual funds experiencing net outflows of $6.7 billion," said the report, which combines assets of collective investment trusts plus official mutual funds.

Net inflows represented "a drop of 59% from the $128 billion we estimate was contributed in 2019," the report said.

The pandemic "weighed on investors and retirement savers' contributions over the course of 2020," Jason Kephart, strategist for the multiasset and alternative strategies manager research team at Morningstar, said Thursday in a news release.

"We saw total net inflows to target-date strategies fall, employers suspending 401(k) matches, and an increase in investor withdrawal rates," he added. "However, we think the target-date landscape is poised for continued growth and change. Longer-term trends show investors are prioritizing low-cost strategies and investing in collective investment trusts."

Assets invested in CITs accounted for about $1.2 trillion, or 43%, of total target-date series assets last year, up from 40% in 2019 and 29% five years ago, the report said. Morningstar uses estimates because "CITs aren't subject to the same reporting requirements as mutual funds," Sarah Wirth, a spokeswoman wrote in an email. "It's voluntarily submitted and sometimes the data is incomplete. Therefore there may be assets/flows that we aren't able to capture."

Although CITs had net inflows in 2020, "target-date mutual funds experienced net outflows for the first calendar year since Morningstar began tracking the data in 2004," the report said.

However, the mutual fund score was affected by the liquidation in December of the $10 billion Kaiser Permanente Retirement Path series. "Excluding this series, flows were positive, though still a paltry $2.7 billion, compared with 2019's $60 billion haul," the report said.

CIT inflows were an estimated $59 billion last year vs. an estimated $69 billion in 2019.

"CITs' main appeal vs. mutual funds is they, unlike mutual funds, give larger room to negotiate fees," the report said. "The Investment Company Act of 1940 requires mutual funds to charge investors the stated expense ratio in its prospectus for each share class. CITs, which are regulated by the Department of Labor and held to the fiduciary standards in the Employment Retirement Income Security Act ... do not have this same requirement."

The Morningtar report found:

• The overall average asset-weighted fee for mutual fund target-date series was 52 basis points last year vs. 58 basis points in 2019 and 73 basis points five years ago.
• For the first time since 2008, the Vanguard Target Retirement series failed to be the leader in total annual inflows (mutual funds plus CITs). Vanguard had $19.5 billion, while BlackRock LifePath Index, placed first with $21.8 billion and Fidelity Freedom Index was second with $19.8 billion.
• Fidelity Freedom Index had the most new mutual fund money ($15.6 billion) last year, knocking Vanguard off the top spot for the first time since 2008. Vanguard's mutual fund inflows were $2.7 billion.
• Vanguard had the most CIT inflows at $16.8 billion last year, just ahead of BlackRock's $16.6 billion.
• Vanguard remains the leader in target-date series market share with 36.7% last year, followed by Fidelity (13.3%), T. Rowe Price (11.6%), BlackRock (9.5%) and American Funds (9.5%). Combined, they account for more than three-fourths of the target-date series market.