The Markets January 23, 2023

TDF Mutual Fund Flows Jump 35%, With CITs Stealing Growth

Target-date mutual funds were by far the top investment vehicle for retirement savers last year, but new research shows collective investment trust funds may be stealing flows.

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Target-date mutual funds continued to reign supreme among retirement savers last year, but new data shows collective investment trust funds may keep them from regaining the heights of a few years ago.

Retirement savers boosted TDF mutual fund contributions in 2022 at a 35% higher rate than in 2021, well off the negative flows seen in 2020 at the height of the pandemic, according to the latest data from investment research provider Morningstar Inc. Savings inflows to mutual fund TDFs were about $32.3 billion in 2022, up from the $24 billion they drew in 2021. Mutual fund TDFs also captured the biggest share of contributions for 401(k) savers, taking 47% of contributions, more than double those of the runner-up, large U.S. equity funds at 21%, according to separate research from Alight Solutions.

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But while the investment vehicles are still dominant, they are off a 2017 peak of $69.9 billion. This is in part due to the popularity of collective investment trusts, according to Megan Pacholok, a senior manager research analyst for Morningstar Research Services LLC.

“Target-date CITs are only available through defined-contribution plans but have managed to gain market share primarily because of fees,” Pacholok wrote in research released on Thursday. “These offerings typically cost less than their mutual fund counterparts, and some providers are willing to negotiate fees even lower. In recent years, the industry’s increasing emphasis on costs has helped further propel CIT growth.”

At the end of 2021, about 45% of target-date assets were in CITs, up from less than 20% in 2014, Pacholok wrote. Meanwhile, CITs accounted for 86% of target-date strategy inflows in 2021. The researcher noted that because CITs are pooled from retirement plans and maintained by a bank or other trust company, CIT flow data are voluntarily reported and usually lag more regularly reported mutual funds.

Active American Funds Beats Out Passive Fidelity

When it comes to market share, Morningstar found that Capital Group’s American Funds Target Date Retirement mutual fund series took in the most flows in 2022. The TDF provider beat out Fidelity Investments’ Fidelity Freedom Index Series, last year’s winner, as well as third-place finisher Vanguard’s Target Retirement Series. The victory is unique in that American Funds is an actively managed account, the only one represented in the top 10, according to Morningstar’s Pacholok.

“Despite index-based target-date series largely dominating in net inflows, American Funds stands as an exception as it exclusively holds actively managed underlying funds,” she wrote. “As other active-based series struggle to maintain consistent net inflows, American Funds’ competitive price tag and strong performance add to its allure. Over the past 10 years through December 2022, the series, on average, delivered higher returns than roughly 99% of peers.”

Fidelity’s Freedom Index, at No. 2 on the list, had one of the lowest price tags and was one of six index-based target-date funds in the space, according to the report.

Meanwhile, Vanguard came in third despite its fund losing out to the firm’s own CIT version of the investment vehicle. In 2022, Vanguard Target Retirement saw $52.6 billion in net inflows to its CIT series, $40.9 billion more than its mutual fund offering, Pacholok noted.

Trading Up, With Shift to Fixed Income

Overall trading of 401(k) plans was up in 2022, according to the Alight research released on January 12. Net trading activity for the year was 1.27%, as tracked by the information and consulting financial firm. That was higher than 2021’s level of 0.53%, but lower than 2020’s level of 3.52%, according to the firm.

The decline in stocks pushed investors into fixed income options, as led by stable value bond funds (76%) and money markets (15%), Alight reported.

“Throughout the more-than-25-year history of the 401(k) Index, we have seen people increase their trading activity when stocks drop—a trend that continued in 2022,” Rob Austin, head of research at Alight, said in a statement. “More than three-quarters of the above-normal trading days (33 out of 41) happened during the first half of the year when the markets were down by 20%. Trading slowed in the second half as Wall Street tried to rally.” 

401(k) investors remained bullish on equities, with most contributions going to TDFs and large cap U.S. equity funds. However, the equity losses resulted in 401(k) savers ending 2022 with 68.2% of their portfolio in equities, compared to 70.7% at the beginning of the year. 

Data & Research January 23, 2023

TIAA Survey Suggests Women May Be Better at Predicting Life Expectancy

The research shows that most people don’t know average life expectancies, but women have a better handle on it than men.

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Most Americans have low “longevity literacy,” or knowledge of life expectancy, according to research from the TIAA Institute and the Global Financial Literacy Center at George Washington University.

The 2022 survey asked 3,582 individuals for the life expectancy at age 60 for people of the respondent’s gender. The sample was weighted for education, income, work status, generation and race.

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For men, the question came with three answers to choose from: 16 more years (living to age 76), 22 more years (82) and 28 more years (88). For women, the answers were 19 more years (living to age 79), 25 more years (85) and 31 more years (91). In both cases, the correct answer was the middle choice of the three provided. Respondents could also answer that they did not know.

Among men, 32% answered correctly, 27% said they didn’t know, 11% overestimated male longevity and 31% underestimated male longevity. Among women, 43% answered correctly, 28% said they didn’t know, 10% overestimated and 19% underestimated.

Surya Kolluri, the head of the TIAA Institute, said the gender gap on longevity literacy was perhaps the most interesting finding. According to Kolluri, women often trail men in general financial literacy, but this survey suggests that men may trail women in longevity literacy.

Kolluri offers theories explaining the results, some of which could provide fodder for future research. For one, the outcome could be related to traditional gender roles in terms of household division of labor: Men are more likely to handle finances, and women health care. Two, women tend to live longer than men, so perhaps they have been incentivized to do more research on the question. Third, women often have less financial security than men, and so their longer lives are an even more pressing concern.

The survey also found that those who either overestimate or correctly estimate their life expectancy tend to have higher self-reported confidence and satisfaction in their retirement, based on their own responses, than those who responded “I don’t know” or who underestimated life expectancy.

But those who got the answer correct and those who overestimate their gender’s longevity had essentially the same retirement preparation behaviors. This could suggest that if someone knows their gender’s life expectancy, or overestimates it, the fact that they are taking it seriously lends itself to more thorough retirement preparation.

For example, 81% of respondents who answered question correctly said they saved for retirement on a regular basis, compared to 80% of those who overestimated their gender’s longevity. Similarly, 54% of both those who answered correctly and those who overestimated have tried to calculate how much they would need for retirement.

Also, those who underestimated their longevity tended to report better preparation than those who answered, “I don’t know,” which could suggest that merely thinking about longevity lends itself to better saving, even if you estimate on the short side.

For example, 37% of retirees who said they did not know their gender’s longevity said their lifestyle in retirement has fallen short of their pre-retirement expectations, compared with 30% of those who underestimated. Of those who underestimated, 68% said they saved for retirement regularly, compared with 57% of those who said they did not know.

One potential flaw in TIAA’s research design relates to the answer structure on the survey, whereby only three choices were provided: the correct one, an overestimate and an underestimate. The answer structure could suggest the correct answer to the respondent, because the middle answer provides a happy medium or “Goldilocks” response and could sound more intuitively plausible than the other answers, each six years off the mark. This could lead to survey results overestimating the number of people who have high longevity literacy due to the answer structure, rather than their actual knowledge.

Kolluri says this could be the case, but even if it is, that would only mean that Americans are actually worse at predicting life expectancy than the reported results suggest. Since only 37% of Americans got the question right with respect to their own gender, most Americans get this question wrong. Kolluri explains that if the true value is 25%, then the same conclusion follows: most Americans cannot predict life expectancy at age 60.

The survey could have asked an open-ended question about life expectancy and measured the number of years between the respondent’s answer and the correct answer. Kolluri defends TIAA’s methodological choice and says he “didn’t want people to be stumped” or overwhelmed by the question, which could have resulted in people giving up and simply answering “I don’t know,” even if they had a reasonable idea that was more than just a guess. This could lead to overestimating the “I don’t know” response.

So while most Americans are not sharply attuned to longevity as a function of their gender, those who have thought about it tend to prepare more for retirement.

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