CIT Assets Expected to Surpass Mutual Fund Assets in TDFs in 2024, per Morningstar

Target-date funds collected roughly $156 billion in new assets in 2023 via flows and investment growth—67% of which went to collective investment trust structures, according to annual data from Morningstar. Total assets in TDFs hit $3.5 trillion last year.

CITs accounted for 49% of TDF assets at the end of last year, and the investment structure is expected to overtake mutual funds as the most popular target-date vehicle by the end of this year, according to Morningstar’s “Target-Date Strategy Landscape Report.”

CITs will “likely be around 51%” of total target-date strategy assets at the close of 2024, says Megan Pacholok, a senior analyst of manager research at Morningstar and the lead author of the report, depending “on the way the market moves.”

In addition to the growing concentration of TDF assets in CITs, Morningstar reported that there is concentration of the TDF business with a small number of asset managers. The five largest TDF managers in 2023 managed about 80% of the market, and the 10 largest firms accounted for about 94%, according to the report.

The growing use of CITs in TDFs is one factor that drove down the asset-weighted expense ratio for the funds to 0.30% in 2023 from 0.32% a year earlier. Investor demand for low-cost funds resulted in funds in the lowest quintile of expense ratios experiencing inflows, while the other four quintiles had net outflows, the firm’s research showed.

The increased assets to CITs in TDF strategies “could give plan sponsors more access to lower-cost options,” explains Pacholok. While “CITs are pretty dominant in larger plans with larger plan sponsors, if they become more and more common, we can see it moving down-market” to mid- or smaller-size plans and affect plan fees, she says.  

“We think that this momentum will continue,” Pacholok adds. “Because CIT and mutual [fund] TDF assets flow were relatively close at the end of 2023, it makes sense that they would become more popular at the end of 2024.”

For the last five years, the asset flow into CITs has increased. Allocations to TDFs in CITs rose at a rate of “about” 2% of market share, each year, Pacholok adds. In 2019, TDF allocations to CITs were 40% of the total market share, according to Morningstar data.

Among the largest TDF manager firms, the mix of CIT and mutual fund offerings varied. “Most of Vanguard’s, T. Rowe Price’s, and BlackRock’s target-date assets were in CITs; most of Fidelity’s and American Funds’ were in mutual funds,” according to the report.

Vanguard had the largest inflows to its TDFs in 2023 at $44 billion. It has collected the most inflows every year but one since 2008, Morningstar reported.

Regarding fund construction, Morningstar found that providers are offering products in multiple series using the same glide paths, but different kinds of underlying funds. The report stated long-term performance of TDFs “are largely similar to one another,” whether built with all active funds, all passive funds or a blend of the two.

For the report, Morningstar gathered the data on mutual fund and CIT TDFs from its proprietary database. The report’s TDF assets inflow data are as of year-end 2023.