Target-date funds, the set-it-and-forget it mutual funds first conceived in the mid-1990s, held $886 billion in assets at the end of 2016, according to Morningstar, begging the question as to whether this will be the year TDFs cross the $1 trillion threshold.
According to the Investment Company Institute, the suspense is over. As of the end of June, TDFs held “approximately” $1 trillion, says ICI. Morningstar says the mark was eclipsed in July.
Wherever the final figure falls by year’s end, it is sure to provide yet another exclamation point on what is arguably the most productive innovation of the asset management industry in a generation.
The final tally will show that about 20 percent of all 401(k) assets are in TDFs. In 2006, the year before the Pension Protection Act made the funds a qualified default investment alternative, TDFs claimed just 5 percent of the 401(k) market.
The growth is nothing short of phenomenal, says Sonia Sharigian, product director for Cogent Reports, a division of Market Strategies International.
“There’s a lot more competition among asset managers because of the growth,” said Sharigian, author of Cogent’s 2017 Retirement Plan Advisor Trends survey.
To be sure, retirement plan advisor specialists, which Cogent classifies as firms with at least $50 million in defined contribution assets under management, are a popular lot with fund companies these days. Sharigian calls them the “gatekeepers” to the 401(k) universe.
The firm does not estimate how much of the trillion-dollar TDF market is advisor-sold. But it does take a thorough look at which fund families plan specialists are recommending, and why.
“All of the fund leaders stand out on their own merits for different reasons,” explained Sharigian.
Here’s a look at how plan advisor specialists are driving the TDF market with the top five advisor-recommended TDFs:
5. T. Rowe Price
T. Rowe Price TDFs were a top recommendation for 21 percent of plan specialists.
The series had $148 billion in assets at the end of 2016, which accounted for nearly 30 percent of all the assets the firm manages. It’s the third largest TDF manager. T.Rowe, Fidelity, and Vanguard account for more than 70 percent of the TDF market.
BlackRock was also the favored family for 21 percent of plan specialists, up from 17 percent in 2016.
All in, the firm manages $5.7 trillion in assets globally. Its target-date book is just a fraction of that—about $11.7 billion at the end of 2016, or the 10th largest TDF manager. More than $3 billion flowed into BlackRock TDFs in 2016, according to Morningstar.
Fidelity’s target-date series was the top recommendation for nearly a quarter of the specialists surveyed by Cogent.
Once the top manager by assets, Fidelity now holds the number two spot, with nearly $193 billion in TDF assets at the end of 2016.
In 2016, more than $2.8 billion flowed out of Fidelity TDFs.
But among plan specialists, Fidelity’s favor is growing. In 2016, Cogent found that the firm was only the top recommendation for 15 percent of plan specialists.
The fact that plan specialists tend to take a long view on their selections explains why the firm is doing well among elite advisors in spite of last year’s outflows, explained Ms. Sharigian.
Vanguard is a close second. Vanguard’s TDFs were the top recommendation among 33 percent of specialists surveyed by Cogent.
The Valley Forge, PA-based firm is far and away the largest TDF manager by assets. At the end of 2016, the series managed more than $280 billion in assets, benefiting from more than $37 billion in new flows, according to Morningstar.
1. American Funds
Cogent’s survey of 124 plan advisor specialists shows that American Funds’ TDFs were most recommended—34 percent said the flagship management arm of the Capital Group was their first recommendation.
According to Morningstar, American Funds’ TDFs held more than $53.6 billion at the end of 2016, making it the fourth largest provider by assets.
Nearly $16 billion of those assets came from new inflows in 2016. Sharigian said the brand stands out with advisors across all of Cogent’s satisfaction metrics.
Getting TDF selection right
One of the more telling facts from this year’s Cogent study: More plan specialists are basing recommendations on individual mutual funds off their favored TDF families.
“Advisors are focused on getting the TDF family selection right from the start,” said Sharigian. “It behooves asset managers to make a stance with their TDFs.”