Sponsors Seek Low-Cost TDFs

Morningstar’s annual “Target-Date Fund [TDF] Landscape Report” finds that retirement plan sponsors continue to seek out low-cost target-date funds. This preference, in turn, is prompting vendors to offer series that rely on passive funds or collective investment trusts (CITs).

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 overall were negative.

Nearly all of the $55 billion in net flows to target-date mutual funds last year went to low-cost series that held over 80% of assets in index funds. Further, 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 did not 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 of many Americans, as they often serve as the default investment option in their defined contribution [DC] 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 such as CITs, reflecting retirement plan sponsors’ desire to meet demands for the low-cost strategies.”

Brooks Herman, vice president of data and research at BrightScope, an Institutional Shareholder Services Inc. (ISS) business, adds: “The overall costs of 401(k) plans have declined.”