The survey documents trends in target-date fund design, costs, and asset flows since the 2008 market downturn as well as target-date strengths, weaknesses, and returns to investors.
It also offers an examination of target-date fund disclosure, and an analysis of the performance of fund series using proprietary, or in-house, versus independent managers in target-date fund construction.
"Target-date funds have been the subject of unprecedented regulatory, governmental, and media criticism in the wake of 2008`s market slide, but that has not deterred millions of investors from making these funds the centerpiece of their retirement savings. According to our data, more than $45 billion in new cash flowed into these funds in 2009," said Laura Pavlenko Lutton, editorial director for Morningstar's mutual fund research group, in a statement.
"Target-date funds have become the retirement vehicle of a generation, and for some good reasons," she continued. The funds have structural advantages over traditional mutual funds, including generally lower costs and dynamic asset allocation that automatically grows more conservative as investors age.`
Within the survey, Morningstar examined investor returns, which represent a typical shareholder`s experience. Investor returns reflect monthly flows in and out of funds, and the returns earned.
With target-date funds, investor returns over the past three years exceeded the funds' total returns in every target-date category except for one, and far exceeded a shareholder's experience owning a traditional mutual fund.
Investors may have turned a deaf ear to criticism of target-date funds, but many fund companies haven't.
Four general trends emerged in this year`s survey.
1. Morningstar found there was a general move among the fund families in the survey to cut costs by lowering expense ratios or introducing cheaper indexed series.
2. Several fund series took steps to reduce risk by lowering the funds` equity allocations, which caused steep losses in 2008.
3. Others introduced or increased exposure to sub-asset classes that they hope will smooth returns.
4. In the Target-Date Survey, Morningstar examined whether `open architecture` series had a performance advantage, and about a third of target-date series Morningstar evaluated features open architecture, or managers who are independent of the fund's advisor. In the aftermath of the market downturn, some members of Congress and the media questioned series that use only proprietary managers, but the Morningstar survey showed no advantage or disadvantage to open architecture.
And other key findings boost the case for the funds:
- Despite unprecedented criticism and losses in 2008, target-date funds continue to be the retirement choice of a generation.
- Investors have done better owning target-date funds than other types of mutual funds.
- In the wake of the market slide, many fund families have taken steps to reduce fund costs and lower risk.
Morningstar's Target-Date Fund Industry Survey is available online.