Morningstar Report Finds Target-Date Funds Rebound

Once widely criticized, retirement fund products see new inflows

A new report from Morningstar finds that target-date funds, so widely criticized after 2008's market slide, have rebounded “quite nicely,” according to the company. In fact, investors who held on to their target-date 2010 funds through 2008's crisis and the ensuing rally have generally emerged with modest gains. From the equity market’s Oct. 9, 2007 peak through Feb. 17, 2011, target-date 2010 funds gained a cumulative 5% on average. Of the 23 funds that were in operation through the entire period, 14 posted a gain.

Target-date funds are an increasingly popular choice for Americans' retirement savings, especially as the funds' performance has rebounded in the bull market, the company says.

Morningstar's 2011 Target-Date Series Research Paper, an annual look at broad trends across target-date funds, found that target-date funds saw healthy inflows in 2010 relative to other mutual fund categories. Target-date funds had net inflows of $47.5 billion in 2010, a small increase over 2009's $45 billion in net inflows. Total net assets in open-end target-date funds reached $341 billion. Morningstar tallies another $33.7 billion in collective investment trusts, or CIT, target-date funds. Morningstar's count of CIT assets is not a comprehensive accounting since firms report CIT assets voluntarily, but companies with larger retirement plans are more often skipping traditional mutual funds and using cheaper CITs in their 401(k) plans.

Target-date funds owe much of their recent growth to the U.S. Department of Labor, which allows retirement plans to designate target-date funds as default investments for employees who don't choose a specific investment from their 401(k) plan's menu. This default designation has prompted billions to flow into target-date funds each year—even during 2008's market crash.

In its study, Morningstar found that the target-date market leaders—Fidelity, Vanguard, and T. Rowe Price—still dominate the target-date fund business with 76% market share. But their grip on the market has weakened just a bit, down from 81% market share in 2007. Smaller and midsize series have been growing quickly, due to a number of factors such as strong distribution networks or innovative and appealing structures. Among the winners has been Wells Fargo Advantage, which offers an indexed series with relatively little equity exposure as investors near retirement. The Wells Fargo Advantage series held up relatively well in 2008's market crash, and net flows to the funds rocketed 129% in 2009 and 37% in 2010.

One of the more surprising findings was that funds attracted new money even after the investors' retirement date. Funds designed for investors retiring in 2005 and 2010 continue to see positive (albeit small) net inflows. It's possible that many account holders have postponed their retirement and continue to contribute to their retirement savings. Or larger contributions by some may dwarf smaller withdrawals by many. In any event, the trend may impact the way target-date funds manage their asset allocation in the post-retirement years.

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