Plan Sponsor Attempts to Lower Fees Drive Changes in TDF Offerings

Morningstar observes more flows into target-date funds (TDFs) using collective investment trusts (CITs) and those investing in index mutual funds.

Morningstar’s annual Target-Date Fund Landscape Report finds that retirement plan sponsors continue to seek out low-cost target-date funds (TDFs), which, in turn, is prompting providers to offer series that rely on collective investment trusts (CITs) as well as series that rely on passive funds.

Morningstar says assets in target-date strategies totaled more than $1.7 trillion at the end of 2018, with $1.1 trillion in mutual funds and approximately $660 billion in CITs. The latter saw a $30 billion increase in assets in a year where returns were negative.

Nearly all of the $55 billion in net flows to target-date mutual funds in 2018 went to low-cost series that held more than 80% of assets in index funds. Furthermore, assets moved to lower-cost share classes, bringing the average asset-weighted expense ratio down to 0.62%, from 0.66% in 2017.

However, returns of a target-date provider’s newer, lower-cost series didn’t always outpace those of the legacy. Of the 10 target-date series that replicate a legacy offering but with lower fees, three failed to keep pace in terms of performance.

“Target-date funds play a central role in the retirement success for many Americans since they often serve as the default investment option in their defined contribution plan,” says Jeff Holt, director of multi-asset and alternative strategies at Morningstar. “Though growth of target-date mutual funds stalled in 2018, the target-date market continues to expand into newer areas like CITs, reflecting retirement plan sponsors’ desire to meet demands for the low-cost strategies.”