TDF Glide Paths Change Little in 2011

It was a relatively quiet year on the target-date fund glide path front—at least as far as major equity/fixed-income changes go, according to Morningstar.

It appears likely that the series stung by poor asset allocation in 2008’s market crash have already implemented subsequent changes. Thus, there is minimal difference in the series’ 2010 and 2011 asset allocations, Morningstar said in its annual Target-Date Fund Industry Survey.  

Longer-dated funds from target-date 2040 onward show little substantive difference in their average equity allocation, which ranges from 87% to 92%. By contrast, the range of allocations for shorter-dated funds remains wide by any definition. Funds with a 2015 target-date average 52% in equities, but the minimum allocation is 20% and the maximum reaches 78%. 

The industry looks tipped slightly more in favor of “through” glide paths than it did last year. Of the 41 glide paths in the 2011 survey, 22 were in the “through” camp and 19 in the “to” camp. This year, out of 46 glide paths considered, 28 are “through” compared with 18 in the “to” camp.  

In 2011, target-date funds produced their worst absolute and relative returns since 2008 as measured by the Morningstar target-date category average returns. However, those results were mild by comparison with the wreckage of the financial crisis. The worst-performing category, Target Date 2050+, produced a 4.1% loss, compared with a 38.8% loss in 2008. The 2011-15 category finished slightly in the red, with a 0.3% loss, vs. a 27.7% loss in 2008.



Flows Ebb, Fees Decline  

Flows into target-date funds continued to cool off in 2011, though they remain one of the most consistent sources of new assets in the industry. While net assets rose only 11% to $378.5 billion in 2011, compared with a year-over-year rise of 33% in 2010, much of that difference can be attributed to 2010’s superior market performance.   

Estimated net inflows into target-date funds, however, rose a healthy 15.8%. Within the respective Morningstar target-date categories, flows varied by a fairly predictable pattern. The longest-dated funds (those aimed at the youngest investors) saw the biggest inflows, with 2050+ funds experiencing organic growth of 38%. Flows trend down as investors age; 2020 and 2015 funds (aimed at investors closer to retirement) grew at slightly less than 10%. And for the first time, funds in the 2000-10 category saw net outflows.  

In 2011, fees on target-date funds continued to decline, advancing an industry trend that Morningstar has observed in each of the past three years. Target-date series have trimmed their expense ratios through a variety of techniques, including the creation of new, lower-cost share classes, expansion of distribution within those cheaper share classes, implementation of lower-cost share classes for underlying funds, greater emphasis on lower-cost index options within portfolios and temporary installment of fee caps and waivers.   

Of the 40 target-date series tracked, roughly three fourths saw expenses decline in 2011, either through direct lowering of fees or shifting of assets to lower-cost share classes. Asset-weighting expenses within each series, then averaging across the industry, shows a fee drop from 1.02% to 0.99%. When expenses are instead also asset-weighted across the industry (with the largest series receiving proportionally higher representation), expenses drop from 0.66% to 0.60%.