Last year's flat equity markets did little to slow the volume of funds flowing into target-date funds, according to Morningstar's 2016 Target-Date Fund Landscape Report.
By the end of the year, total TDF assets hit $763 billion, up from $706 billion at the end of 2014. The $69 billion in positive flows was a record. For context, the Standard and Poor's 500 Index was down marginally for 2015.
Ten years ago, before passage of the 2006 Pension Protection Act, which allowed sponsors of defined contribution plans to default participants into TDFs, the funds held $116 billion. Morningstar expects TDFs to continue to attract more assets.
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"As the default investment in many defined contribution plans, these funds have a clear runway for continued, steady growth," said Jeff Holt, Morningstar's associate director of multi-asset strategies research, in a statement.
All of the TDF categories Morningstar tracks were down last year, reflecting the weakness in equity markets.
But investor contributions surged, suggesting investors are using TDFs as they were designed: to attract consistent contributions from retirement savers even when markets send jittery signals.
"Target-date investors have benefited from good behavior," said Holt. "While investors in most other broad categories tend to buy high and sell low, target-date investors' pattern of steady contributions and a hands-off approach has allowed them to realize higher returns."
For some asset managers, those consistent contributions from TDF investors have been a "lifeline" for their overall businesses, according to Holt.
T.Rowe Price and American Funds would have seen net outflows firm-wide had TDF contributions not been so strong, according to the report. T.Rowe Price's TDF series accounts for 17.3 percent of the market, the third largest share being Vanguard TDFs, which hold 29.5 percent of all TDF funds, and Fidelity TDFs, which hold 23.8 percent of the market.
Among the 10 largest providers, JP Morgan funds experienced the largest organic growth in 2015, with assets increasing 34.2 percent. All told, JP Morgan TDFs account for 4.9 percent of the market.
Vanguard, American Funds, TIAA, and American Century Investments also saw double-digit organic growth, while Fidelity and Wells Fargo funds were the only two providers among the 10 largest to see outflows in TDFs.
Putnam's series of TDFs saw 64.5 percent organic growth in 2015, the most of the 39 fund families listed in Morningstar's report. Those funds hold about $575 billion in assets, or 0.1 percent of the market.
AllianceBernstein's series saw the largest losses as a percentage of previous year assets, dropping 53.3 percent in 2015. The firm liquidated one series, the AB Retirement Strategies, near the end of the year.
Fund managers' investment strategies show wide variance, but the report notes that all target date managers deploy active strategies to some degree, even when TDFs are built with passive index funds.
"A passive approach to target date investing does not exist," the report notes.
Diversity in strategy is most notable as investors reach and surpass their glide path.
The maximum equity allocation in a 2015 glide path nears 60 percent, compared to the lowest threshold, which holds less than 10 percent in equities. The funds' average equity holding for 2015 glide paths was more than 40 percent.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
