For as meteoric as their rise to prominence in the defined contribution world has been, the best may yet come for target date fund providers.

Analysts’ numbers vary, but by most accounts TDFs’ aggregate value is in the vicinity of $700 billion: Morningstar claims total assets were about $760 billion at midpoint last year.

Analysts at Cerulli Associates have predicted TDF assets will hit $1.7 trillion by 2018, and will account for 90% of defined contribution assets.

To compare, in 2012 TDFs had only attracted about 13% of plan assets.

That potential for growth is likely to inspire continued innovation in fund design, and perhaps drive expense ratios down further.

But as the new year has so far been marked by dramatic volatility in equity markets, at least one proponent of TDFs is concerned fund managers have investors exposed to too much equity risk at the end of their glide paths.

“I think we’ve forgotten 2008,” says Ron Surz, the president of Target Date Solutions, an Orange County-based consultancy that has patented a target date allocation model, branded as Safe Landing Glide Path. 

Surz is a radical in the target-date industry. He doesn’t think TDFs should hold any equity risk as investors come to the end of their glide path.

He fears 2016 could be the year the chickens come home to roost for TDF investors with a 2015 glide path.

Data from Morningstar says the industry average for equity exposure at the end of target-date glide paths is in the neighborhood of 50%.

A 20% decline in equity markets could mean a 10% loss in TDF value for someone retiring this year, presuming half their assets are allocated to equities.

That of course presumes fixed-income assets won’t be equally volatile.

“Don’t get me wrong—I like target date funds for their diversification and risk control capabilities,” said Surz. “But what is the upside to taking risk with life savings at retirement?”

He thinks fund companies have been in a horse race since the credit crisis, eager to capture the upside in equities and incentivized to take more risk than they should.

Money managers get paid more from equities than from fixed-income investments, or for that matter money markets, which is where Surz puts assets at retirement age in the funds he designs and manages.

Some fund families attracted more inflows to their TDF offerings last year than others.

Proprietary data, provided to ous sister site BenefitsPro by Morningstar, shows net new inflows up until the end of November 2015, and gives how much each family’s fund series manages in total assets.

We’ve also taken data on a 2015 target date glide path fund from each family, comparing equity exposure, retail class expense ratios, and the funds’ average return over five years, data gleaned from providers’ websites or prospectuses, unless otherwise noted.

Below is a list of the five fund families that attracted the most inflows to their TDF offerings last year:

Vanguard Sign (Photo: AP)

1. Vanguard Target Retirement Funds

Net new inflows: $33.4 billion

Total TDF AUM: $225.4 billion

Vanguard Target Retirement 2015 Fund

Equity exposure: 55%

Expense Ratio: 17 basis points

5-year avg. return: 6.31%

 

JP Morgan Sign on a building in NYC. (Photo: AP)

2. JP Morgan

Net new flows: $9.7 billion

Total TDF AUM: $38.2 billion

JPMorgan SmartRetirement 2015 Fund

Equity exposure: 37.5%

Expense Ratio: 81 basis points

5-year avg. return: 6.03%

 

T. Rowe Price Sign.

3. T. Rowe Price

Net new flows: $9.6 billion

Total TDF AUM: $133.4 billion

Retirement 2015 Fund

Equity exposure: 55%

Expense Ratio: 62 basis points

5-year avg. return: 6.48%

 

American Funds Web Site

4.  American Funds

Net new flows: $8 billion

Total TDF AUM: $35.9 billion

American Funds 2015 Target Date Retirement Fund

Equity exposure: 46%

Expense ratio: 71 basis points

5-year avg. return: 5.32%

 

TIAA-CREF Sign on a building in NYC. (Photo: AP)

5. TIAA-CREF

Net new flows: $2.8 billion

Total TDF AUM: $25.4 billion

TIAA-CREF Lifecycle 2015 Fund

Equity exposure: 51%

Expense ratio: 65 basis points

5-year avg. return: 6.25%

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