Today we announce recent findings in target date funds (TDFs) as a result of our examination of the lowest cost institutional share class for all target date funds through February 2015. This includes 59 target date series, composed of 561 distinct target date funds from 40 different asset managers.
Moving away from a broken model
In the past year, we’ve seen greats shifts in the Target Date Fund markets, including strong asset growth due to a strong equity market, fees continuing to shrink, and the industry overall moving away from a broken distribution model. Most importantly, we’ve witnessed an ongoing acknowledgement by plan sponsors and advisors that defined contribution participants prefer to have their retirement accounts professionally managed, and TDFs continue to be the vehicle of choice to meet this need.
Distribution and channel management are still critical components for success for many target date asset managers. Recordkeepers have relied on pushing their own TDFs to plan sponsors, using their own recordkeeping platform as the natural means to distribute their TDFs. Historically, the big recordkeepers like Fidelity, Vanguard, and T. Rowe Price have used this model very effectively.
The distribution channel is getting more competitive
The old model has been broken. BrightScope looked at a sample of 10,000 401k plans from 2010-2013, and we observed a decrease in proprietary target date assets from 57% (2010) to 55% (2011) to 52% (2012) to 50% (2013). Plan sponsors are looking off-platform for the best target date funds for their employees. As this trend indicates, the distribution channel is getting more competitive. Tweet This
A poignant case study of the power of TDF distribution would be iShares S&P Target Date funds who folded up their target date fund this past year. The large ETF provider, iShares, was trying to merge two trends with tremendous tail winds: growth of ETF assets and growth of popularity in target date funds. Yet, without a firm distribution mechanism, iShares liquidated their TDFs and walked away from the target date channel.
BrightScope was pleased to observe that fees continued to fall in 2014, and hope to see this trend continue in 2015 and beyond. In examining fees for the lowest cost share class for each target date series, the average fee was .65 percent, down from .67 in 2013 and down almost 10 percent overall since 2011.
Assets Under Management (AUM)
As of February 2015, Target Date Fund assets jumped to more than $700 billion in Investment Act of 1940 funds, an increase of 12 percent over last year’s figures. Tweet This
When collective investment trusts and pooled separate accounts are added, BrightScope estimates total target date assets to be closer to $1.1 trillion, a 22 percent increase over last year’s estimate and a 280 percent increase over the past five years.
Four years ago, BrightScope predicted that target date assets would top $2 trillion by 2020, and we stand by that prediction today.
Entrants and Exits
Since BrightScope’s last report on TDFs in June 2014, the target date series has seen three market exits and six entrances. This is indicative of a larger trend being revealed within the marketplace, as asset managers offer more target date products to meet investor demand.
- State Street Target Retirement Fund
- Principal LifeTime Hybrid
- Voya Retirement Solution
- PIMCO RealPath Blend
- BMO Target Retirement
- Madison Target Retirement
- Hartford Target Retirement
- iShares S&P Target Date
- Legg Mason Target Retirement
Glidepath and Landing Point
BrightScope observed glidepath’s continued stability from two previous reports, with equity at the stated target date for funds holding at 41 percent. Meanwhile, equity at the landing point (the most conservative point of the glidepath) remained the same at 30 percent, where it has been holding steady since 2012.
To vs. Through
The percentage of fund families bringing their glidepath down to its most conservative position at the target date (BrightScope’s definition of a “To” fund series) is 25 of the 59 target date series in the study. Three of the six new entrants were “To” funds, while all three exits were “Through” funds.
In a role reversal from last year, only three of this year’s six new fund series were “Through” Funds (the other three being “To” Funds), whereas in 2014 “Through” Funds made up all four new series joining the market. Additionally, all series leaving the market since this last report was last issued in 2014 were “Through” funds.
NB: This data is accurate as of April 22, 2015
About the Author
Brooks has been cited in the New York Times, Wall Street Journal, ABC News, CNN Money, Bloomberg, Reuters, and The Financial Times. Previously, Brooks worked at ARCH Venture Partners and Rockefeller & Company in New York.
Brooks received his bachelor’s degree from Columbia University, received a master’s degree from Harvard University, and received his Master of Business Administration in finance from the Rady School of Management at UC San Diego.