Contributions to TDFs Fell As the Market Rebound Increased Assets

A Morningstar report has found retirement savers’ contributions continued to suffer even as the markets rebounded from last year’s volatility.

The findings were reported in Morningstar’s 2021 “Target-Date Strategy Landscape Report,” which said flows into target-date funds (TDFs) and collective investment trusts (CITs) sank to $52.3 billion last year, a 59% decline from the previous year.

Total assets in target-date strategies amounted to $2.8 trillion at the end of last year, however, which was a reported increase of 20% from 2019. Retirement plan watchers would expect assets to rise with the markets.

The Morningstar report explored key trends, including the use of CITs, and found that CITs continue to increase in market share and now represent 43% of all target-date strategy assets at more than $1 trillion.

The report expects TDF providers to closely watch CIT activity, especially as potential retirement policy solutions would allow 403(b) plans to invest in CITs.

A report from Simfund found similar target-date flow results as Morningstar. The business intelligence platform reported target-date flows for year-end 2019 were $58.4 billion, yet they were only $8.8 billion for year-end 2020. This data only pertained to mutual funds.

Simfund data shows TDFs recorded lower flows in Q1 2020 at $2.9 billion and Q2 2020 at $2.4 billion, much smaller than Q4 2019 at $14.9 billion, yet they remained on a positive net flow through the first half of last year.

Both Morningstar and Simfund reviewed impacts of the economic uncertainty brought on by the coronavirus pandemic and its effect on TDF contributions.

Simfund says the pandemic had a large effect on any investment product. However, a Simfund representative notes that the activity of TDFs contrasted with that of other mutual funds, suggesting this decline was not purely a matter of investors removing assets. According to Simfund, mutual funds overall (excluding money market funds and long-term funds) witnessed outflows of $276.4 billion in Q1 2020 and outflows of $7.6 billion in Q2 2020. Exchange-traded funds (ETFs) flows were more strongly positive, therefore only Q1 saw net long-term outflows at $220.8 billion for the combined total of mutual funds and ETFs. Q2 net inflows totaled $103.8 billion, reported the company.

Simfund also pointed to the closure of the Kaiser Permanente target-date series managed by Callan LLC as a caveat for last year’s outflow numbers. The target-date series had a collection of four core funds with assets of $10.6 billion. While Simfund predicts the series would have produced net inflows of $2.5 billion for 2020 overall, it still would have been less than in previous years, says a representative.

Of all TDFs, the Morningstar report highlights the BlackRock LifePath Index series for collecting the most net new money among target-date series, at approximately $22 billion in net contributions between its mutual funds and CITs. 

*Editor’s note: PLANADVISER and PLANSPONSOR magazines are owned by parent company Institutional Shareholder Services (ISS), which also owns Simfund.