Target Date Funds Hammered by Q1 Market Turbulence: Morningstar

In 2019, investors continued to exert pressure on target date funds by choosing cheaper share classes. Morningstar reported that $58 billion went into share classes that charge less than 0.2% last year, up from $51 billion in 2018.

In contrast, share classes that charge a mid-range 0.41% to 0.6% had net outflows of $3 billion in 2019, a reversal from the previous year when those share classes had $19 billion of net inflows.

CITs, which generally cost less than mutual funds, have benefited from the trend toward lower fees, according to Morningstar data. Their market share had grown to roughly 40% as of March, up from less than 20% in 2014.

Over the past three years, CIT series launches have outpaced those of mutual funds by nearly five to one.

Morningstar's report said the target date industry remains top-heavy, with the top five firms by assets representing 79% of target date strategy assets in 2019, up from 78% the year before.

BlackRock and American Funds both gained market share during the year, while Vanguard and Fidelity held steady, and T. Rowe Price lost ground. Vanguard, whose series boast low costs, remains the most popular target date series with a market share of about 37% at the end of March.

According to the report, target date strategies that favor actively managed underlying funds have generally suffered from the trend toward low-fee options. The majority of those series' fees come from the underlying active equity funds.

An analysis of their equity factor exposures and active share indicates only modest differences compared with passively managed alternatives.

Passage of the Secure Act in December could have meaningful ramifications for target date funds going forward, according to the report. The legislation eases the liability risks plan sponsors face when offering annuities to participants and opens the door for annuities within a target date series' glide path.

Morningstar said the inclusion of a guaranteed income option raises due diligence questions for investors, with a microscope on fees, contract structure and impact on the glide path.