COVID-19 causing near-retirement TDF investors to pull savings

The preponderance of data through the end of March showed 401(k) investors were mostly resistant to panic during massive market selloffs due to the Covid-19 pandemic. But new data is showing near-retirement target-date fund investors redeemed savings at unusually high rates during March, according to Morningstar.

The data is “a sign of how much fear gripped investors in March,” said Jason Kephart, senior manager research analyst at Morningstar.

Investors in TDF vintages ranging from 2020 to 2035 withdrew $9.4 billion in March, marking an “unusual lack of discipline,” Kephart wrote in a research note.

Redemptions in 2020 funds were more than $5 billion in March alone. Another $2.3 billion was redeemed in January and February, accounting for 4 percent of all assets in 2020 funds.

While some outflows in 2020 funds is expected as they arrive at their retirement glidepath, the rate of redemptions is considerably higher than in recent years. Kephart compared the rate of organic growth in the first quarter of 2015 to the first quarter of 2020. When 2015 funds hit their glide path five years ago, the vintage suffered negative 1 percent in organic flows. In the first quarter of 2020, the vintage suffered negative 4 percent in organic flows.

Kephart said Morningstar’s data does not distinguish between which redemptions were made as scheduled, and which were made in reaction to plummeting equity markets. That data would be available at the individual sponsor level, he explained.

Nevertheless, the overall number clearly indicates that a high number of investors relative to previous years pulled assets from 2020 TDFs before they retired or were scheduled to redeem savings, said Kephart.

TDFs of a 2025 vintage saw more than $4.1 billion in outflows during March, with 2030 vintages suffering nearly $3 billion in redemptions. 2035 funds saw about $400 million in redemptions.

“There was a ripple effect further away from retirement, which is pretty unusual,” said Kephart.

How different series fared

Vanguard’s Target Retirement Series, which accounts for 38 percent of the mutual fund TDF market, saw $3.13 billion of outflows in March, but for the quarter, still was able to attract more than $6.8 billion across all vintages.

Vanguard investors pulled $1.38 billion from 2025 funds, almost as much as was redeemed from the 2020 vintage. The 2030 fund saw $600 million in redemptions.

“Vanguard is the bellwether for the market,” said Kephart. “Clearly, investors are not leaving to go to cheaper funds. It’s indicative of the overall investor sentiment and fear.”

American Funds Target Date Retirement Series captured nearly $4 billion in net flows for the quarter, including $53 million of inflows during the third quarter. It’s 2020 and 2025 funds had negative flows, but less severe than the rates for the entire vintages.

T. Rowe Price’s Retirement Series had the most outflows, at nearly $4.9 billion, but Kephart said much of that is likely due to an ongoing shift from the series mutual funds to T. Rowe’s collective investment trust series.

The tumultuous quarter for TDFs serves as a reminder for sponsors to stay on top of their target date providers.

“Everyone has a plan until they get punched in the face,” said Kephart. “Sponsors will want to double check funds’ glidepaths and whether they are appropriate for the people they are picking them for,” added Kephart.

Total TDF assets ended the quarter at $1.17 trillion, down 15 percent from the $1.37 trillion in the funds at the end of 2019.

The good news for retirement savers is that despite the really rough ride of late, 2019’s strong returns and healthy contribution rates to TDFs have left assets in the funds higher than they were at the end of 2018.