Morningstar Report Finds Target-Date Funds Rebound

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.