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Demand for low-fee products is is “reshaping the target date fund landscape,” according to Morningstar’s latest annual report on TDFs.

Money flowed into low-cost mutual fund TDFs and collective investment trusts, which are also low-cost structures for institutional investors that often allow for negotiated prices, and out of high-cost funds with net expense ratios above 60 basis points. 

By the end of last year, target date funds had a total $1.7 trillion in assets — $1.1 trillion in mutual funds and $660 billion in CITs.

Assets in mutual fund TDFs fell for the first time in 10 years as a result of negative returns and slowing demand for higher cost funds, but inflows were positive. Mutual fund TDFs saw net inflows of $55 billion, all into low-cost funds.  

“Though growth of target date mutual funds stalled in 2018, the target date market continues to expand into newer areas like CITs, reflecting retirement plan sponsors’ desire to meet demand for the low-cost strategies,” said Jeff Holt, director of multi-asset and alternative strategies at Morningstar.

As a result of this demand, more asset managers including Fidelity, JPMorgan and Pimco are offering lower cost index TDFs or CITs, and when they do, investors tend to choose the cheapest ones.

Demand for lower cost funds drove the average asset-weighted expense ratio for TDFs to 62 basis points in 2018 from 66 basis points the previous year.

Given this focus on low costs, it’s not surprising that Vanguard remains far and away the lead asset manager in the TDF market, capturing a 37% share, about twice as much as Fidelity. T. Rowe Price is the third largest manager for TDFs assets. Those three asset managers plus American Funds, JPMorgan, Nuveen’s TIAA Investments and BlackRock control 90% of the TDF market.

— Check out SEC Plan to Limit Fund-of-Fund Redemptions Gets Heat From Fund Industry  on ThinkAdvisor.