“We found that target-date funds with significantly different asset allocations deliver similar retirement savings outcomes up to age 85. And as the target-date industry matures, we see an increase in diversification of the underlying investments in terms of both fund strategy and geographical location. Though the asset allocation or fund selection among target-date investments varies, target-date funds are relatively suitable investments for retirement savings. Investors realize that, too, and continue to put their money in these funds,” according to Josh Charlson, fund-of-funds strategist for Morningstar, Inc., and lead author of “Target-Date Series Research Paper: 2013 Industry Survey.”
Using the Monte Carlo analysis methods, simulating possible allocations a glide path could take, Morningstar tested the likelihood of investors being able to successfully retire. The test used common assumptions of salary, savings rate and expected retirement age. Morningstar compared glide paths that shifted their asset allocation “to retirement”–when a target-date fund discontinues asset allocation adjustments once the retirement date is reached–and those that continue to shift “through retirement”–when a target-date fund continues to shift its allocation more conservatively after the retirement date is reached. The research found target-date investors in different series have similar probabilities of accumulating sufficient savings, at least through age 85.
The findings of the survey also included:
- Average industry glide paths--the outline of a target-date fund's changes in its stock and bond balance over time--should reasonably meet the typical worker's spending needs in retirement.
- More target-date assets are shifting to passively managed investments, as both an underlying holding within a portfolio and as an overall investment approach. While 68% of target-date assets were in actively managed series as of December 31, 2012, inflows to passively managed series--those that invest 80% or more in passively managed investments--surpassed flows into actively managed series for the first time for the 2012 calendar year.
- Managers of target-date series have significantly increased allocations to non-U.S. equities. Since 2005, international stocks have risen from 24% of the average 2040 fund's equity allocation to 36%, as of December 31, 2012. Emerging-markets bond funds appeared in nine target-date series in 2008, compared with 18 in 2012.
- Target-date series have become established fixtures in defined contribution plans: assets are rising, fees are falling, and performance reflects strong broad market trends.
- Assets in target-date series crossed the $500 billion mark in the first quarter of 2013. While the industry's organic growth rate has slowed, its growth is still competitive with other broad mutual fund asset classes.
- Fees continue to fall, as the asset-weighted average expense ratio dropped to 0.91% in 2012 from 0.99% in 2011.
- The industry's market leaders--Vanguard, Fidelity, and T. Rowe Price--still control about three-fourths of the industry's assets, despite impressive growth from some of the industry's smaller players. Four target-date series shuttered in 2012--American Independence, Columbia, Oppenheimer, and Goldman Sachs.