(PlanSponsor) - Passive target-date fund suites are growing faster than active series, while TDF providers that are also recordkeepers continue to dominate the market and TDFs based on collective investment trust investments are growing significantly faster than those based on mutual funds, new research shows.
TDFs invested in passively managed underlying funds captured 60% of TDF retirement assets in 2022, up from 51% five years earlier, found a new report from Sway Research, an independent provider of retirement market data and analysis.
Assets in passive TDFs grew 14% annually, compared to 4% for active target-date suites over the five years, according to the research report, “The State of the Target-Date Market: 2023—Examining Asset Trends Across Providers, Products, Vehicles, Management Styles and Glide Path Structures.”
“Low costs and solid performance drive target-date sales [and] the low-cost side of this equation greatly favors target-date series that invest in passively managed underlying funds,” says Chris Brown, founder and principal at Sway Research, via email. “The push for low-cost products also favors target-dates that utilize collective investment trusts over mutual funds.”
As with most asset classes, returns for target-date suites were decidedly negative in 2022. Though active TDF series produced the lowest average asset-weighted 2022 return of -16.6% (only slightly worse than hybrid at -16.46% and passive at -16.48%), over three-, five-, and 10-year periods, active TDF series produced the highest returns, trailed by passive series, with hybrid in third, Sway found.
At the start of this year, active target-dates held 31% of defined contribution assets under management, down from 33% a year earlier, while hybrid offerings held 9%, the research found.
While hybrid target-date funds—that blend active and passive strategies—grew 15%, that group of funds grew from a small beginning asset base, Brown noted in a press release.
Given the trend toward passive target-date primacy, actively managed target-date assets could be eclipsed twofold, Brown stated.
Passive target-dates may be attracting greater assets because the series retain a “massive” fee advantage, Sway Research stated.
On an asset-weighted basis, the expense ratios for TDFs fell in 2022, the Sway data showed. At year-end, the median asset-weighted ratio of an active target-date mutual fund series was 1.4 times the median hybrid series and 2.7 times the median passive series; the asset-weighted expense ratio of an average active mutual fund TDF series dropped to 57 basis points from 58 basis points; and hybrid TDF series fees fell to 41 bps from 43.
Meanwhile, passive target-date fees were substantially lower and decreased in 2022 to 9bps from 11bps, according to Sway Research.
The research also showed that 2022’s market decline did little to shift dominance of the TDF market from defined contribution recordkeepers. Sway found that firms with both asset management and defined contribution recordkeeping functions control 83 cents of every dollar invested in TDFs, and the 10 largest TDFs control 94.1% of the AUM, up from 91.7% in 2017.
In addition, Sway found that assets in mutual fund-based TDFs are shrinking, relative to assets in collective investment trust-based TDFs. Mutual-fund based TDFs ended 2022 below not only 2021’s level, but 2020’s level as well. At the end of 2017, mutual fund-based TDFs held 63% of all target-date assets, compared to 37% for CIT-based products. By the start of 2023, this mix was 52% to 48%, mutual fund to CIT.
At the current rate of change, Sway predicted, assets in CIT TDFs will top those in mutual fund TDFs later this year.
Over the last five years, assets in CIT-based TDFs increased an average of 16% annually, compared to just 6% growth for mutual fund-based solutions.
The annual Sway Research report is based on a proprietary database of mutual fund and collective investment trust target-date portfolio and asset data, which included 130 target-date solutions that held assets at the end of 2022, across more than 6,000 mutual fund share classes and CITs, according to Sway Research.
By Noah Zuss and Amy Resnick
February 14, 2023
