TDF Market Shows Signs of Maturity

An increase in the number of TDF providers has been a positive development for investors, as it has led to lower fees and more product choices, according to Mercer research. 

By John Manganaro | April 10, 2017
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The March 2017 Target-Date Trends report from Mercer highlights evidence of a robust and evolving target-date fund (TDF) market, with total assets invested reaching $1.29 trillion in the fourth quarter of 2016.

This is up from $1.03 trillion in in the fourth quarter of 2015, according to Mercer’s findings. The asset growth has been supported by “strong participant-directed cash inflows, with TDFs now being the default investment option (QDIA) in many defined contribution (DC) plans, and also by strong absolute performance.”

Interestingly, Mercer reports the largest four providers of TDFs have continued to maintain their dominance in terms of assets under management, “although their market share has declined from 82% in the fourth quarter of 2011 to 75% in at the end of 2016.”  Their relative positions have changed, however, “with the largest TDF provider [Vanguard] now having approximately one-third of all the assets surveyed.” Fidelity and T. Rowe Price round out the top three. 

The majority of TDF providers continue to construct their TDF portfolios using proprietary funds as the underlying investments, Mercer finds, “despite reports of plan sponsor unbundling trends.”

According to Mercer, in aggregate, across providers and funds, all vintage years between 2060 and 2020 experienced an increase in total assets during 2016. In contrast, vintage year funds that had passed their target years experienced a decrease in total AUM—as would be expected.

“This is not a significant surprise,” Mercer researchers agree, “and although a variety of reasons can be proposed, we are confident the key reason is individuals rolling their assets out of their DC plans at or around retirement. It will be interesting to see whether this trend changes given that more plans are encouraging retirees to stay in the plan.”

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