Target-date funds continued to benefit from their role as a default investment vehicle in employer-sponsored retirement plans by growing their assets under management by 29 percent last year, to an all-time high of nearly $485 billion.
According to a report from Morningstar’s investment management division, Ibbotson Associates, that growth rate slightly exceeds the growth rate in these vehicles during the past three years, but was well below the category’s average annual growth rate of 43 percent since the start of 2000.
Target-date funds, otherwise known as life cycle funds, invest in a range of equity and fixed-income mutual funds. Their allocations become more conservative the closer a fund nears its targeted retirement date.
The category’s growth in assets under management comes from two sources: cash flows and market performance. Regarding the former, target-date funds have benefited from the U.S. Labor Department's decision in 2007 to make them one of three qualified default investment options in employer-sponsored retirement plans. According to the U.S. Government Accountability Office, target-date funds have become by far the most popular of the three default options.
As for performance, this fund category as a whole benefitted last year from the solid gains across most asset classes.
According to the Morningstar report, the big three in the target-date fund space—Fidelity, Vanguard and T. Rowe Price—hold roughly 75 percent of total assets. Principal Funds and Wells Fargo Advantage fill out the top five.
During the fourth quarter, Vanguard, Fidelity and T. Rowe Price grabbed 69 percent of net inflows. Other providers with significant flows during the quarter included Wells Fargo Advantage, John Hancock, TIAA-CREF, J.P. Morgan and American Funds.
On the flip side, AllianceBernstein, Principal Funds and ING Retirement Funds suffered the largest outflows during the fourth quarter.