Thanks in part to the growth of collective investment trusts (CITs) and a rebound in investor contributions, total assets in target date strategies grew to a record high in 2021.
CITs apparently are on pace to overtake mutual funds as the most popular target-date vehicle in the coming years, according to Morningstar’s annual Target-Date Strategy Landscape Report. In 2021, net contribution to CITs outpaced mutual funds $146 billion to $24 billion and accounted for 86% of target-date strategy net inflows, up from 54% in 2019. These vehicles now make up 45% of total TD strategy assets, up from 32% five years ago.
Overall, Morningstar found that total assets in TD strategies grew to a record $3.27 trillion at the end of 2021—nearly a 20% increase over the previous year.
“Assets in target-date strategies reached a record high in 2021 as investors poured net contributions of $170 billion into the space,” says Megan Pacholok, manager research analyst at Morningstar. “We are also seeing the remarkable advance of collective investment trusts, which made up roughly 86% of 2021’s net inflows. Plan sponsors are attracted to the lower costs of these vehicles, and we expect their growing popularity to persist.”
Fees and Flows
Not surprisingly, low fees continued to drive TD mutual fund flows. Overall, TD share classes landing in the cheapest quintile amassed $59 billion in inflows in 2021, up from $41 billion in 2020. The second-cheapest quintile gathered $3 billion, the report shows. Meanwhile, the three more costly quintiles in aggregate had outflows of more than $38 billion. “This trend builds on previous years, when net inflows also leaned hard to the cheapest decile of target-date share classes,” the report observes.
Over the last year, the cheapest and second-cheapest quintiles experienced the largest average fee reduction on a percentage basis, dropping 9.4% and 14.6%, respectively, for the 2025 vintages and 10.4% and 12.2% for the 2045 vintages, the report notes. The three pricier quintiles’ average fee also dropped but at a smaller, mid- to-high-single-digit clip for both vintages.
Going forward, the cheapest quintile has less room to make future cuts given its lower starting point and how far fees have already fallen, Morningstar emphasizes. The average fee in this group is now 0.11% for both vintages, down from 0.47% and 0.46% for the 2025 and 2045 vintages at the beginning of the period. “That is a 76% reduction overall—the fastest among all quintiles. However, the rate of reductions has slowed following a flurry of cuts in 2018,” the report notes.
Higher Equity Stakes
TD managers have become more comfortable with higher equity stakes over the last decade, the report emphasizes. At the starting point, stock weightings have moved up 7 percentage points to 92% from 85% in 2011—with some sponsors now starting at nearly 100% in equities—while at retirement, they have climbed 3 percentage points to 46%.
On a relative basis, Morningstar notes that the largest change came in the portfolios 20 years to retirement. A decade ago, the median vintage counted 69% of assets in equities, yet in 2021, it was roughly a fifth larger, coming in at 82%.
“Firms’ preference for ‘through’ retirement glide paths over ‘to’ retirement is one reason for the shift toward higher equity weightings, as ‘through’ retirement glide paths’ gradual de-risking after the target-retirement date allows for more equity risk during savers’ working years,” Morningstar explains.
TDF Leaders
Meanwhile, after slipping last year for the first time since 2008, Vanguard Target Retirement Series reclaimed top asset-gatherer spot. The series accumulated more than $55 billion in net mutual fund and CIT inflows in 2021, with its CITs taking in most of the net new dollars, the report notes.
Fidelity Freedom Index held the second-place spot, with approximately $45 billion, and trailing Vanguard by roughly $9.7 billion. While BlackRock LifePath Index recorded a stable year of net inflows, it fell to third from first in 2020, as the strong recoveries by Vanguard and Fidelity leapfrogged it.
CIT growth helped push State Street Target Retirement into fourth, and American Funds Target Date Retirement, which experienced the second-highest mutual fund flows every year since 2016, rounded out the top five. Morningstar notes that JPMorgan SmartRetirement Blend is the only series that did not maintain its top-five spot from last year. Still, there were no changes to the top 10 providers in 2021, beyond the ranks being shuffled, the report notes.
Overall, the industry remains top heavy as the largest five providers control roughly 79% of target-date market share and the top 10 claims more than 90%.
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