arrow_backReturn

1Q20 Target Date Flows

As we all know by now, the first quarter was a tumultuous time in the market. Investors were spooked for the first time in a while, which can affect flows. Additionally, with annual retirement plan reviews occurring in late 2019 and early 2020—in advance of this surge in volatility—we believe it is possible that many plan sponsors may have switched to a new target date offering.

Avatar

By Clayton Fresk on May 13, 2020



As we all know by now, the first quarter was a tumultuous time in the market.  Investors were spooked for the first time in a while, which can affect flows.  Additionally, with annual retirement plan reviews occurring in late 2019 and early 2020—in advance of this surge in volatility—we believe it is possible that many plan sponsors may have switched to a new target date offering.

 

Possible changes could be their switching to a passive from an active vehicle or vice versa choosing a different vehicle (mutual fund vs CIT), potentially selecting either an entirely new target date issuer, or even possible moving away from target date funds entirely.

 

So how did the 1st quarter of 2020 shake out?

 

First off, as of this writing (May 7, 2020), almost all TDFs had reported 1Q20 AUM (which is the basis for the flows calculation).  For those who had not (and who will remain nameless), the AUM was adjusted for performance only and hence no true flows were calculated (again, this was for a small number of issues).

 

For the quarter, TDFs saw a net inflow of $17BB, which is a bit low as compared to 2019 (which saw nearly double that at a quarterly average of $35BB).  While there was still contribution activity occurring, there were other forces at hand that dragged the number down, which could include:

  • investors switching out of a TDF into a different vehicle (i.e. cash)
  • employees suspending periodic contributions
  • employers suspending matching contributions
  • needing to liquidate a TDF in order to take a hardship withdrawal

When isolating only the 1st quarter of 2019 (flow of $59BB) the number was significantly lower, which further exemplifies the different environment we’re in so far this year.

 

In terms of active vs passive, the quarter saw a continued trend away from active vehicles:

  • Active: -$3.5BB
  • Blend: +$6.8BB
  • Passive: +$13.7BB

That active number looks even worse when adjusted for American Funds, which continues to buck the trend of active vehicle outflows (American saw +$3.5BB on the quarter, leaving all other active vehicles combined at -$7.0BB).

 

A major contributing factor on switching from an active TDF to a blend or passive TDF is costs.  Using ending AUM, the asset weighted average active TDF cost is 0.58%, as compared to only 0.09% for a passive TDF (and 0.39% for a blend TDF).

 

Another way to lower costs is for a plan to move from a mutual fund structure to a CIT structure.  That trend seemed to have continued this quarter, as CIT saw a bulk of the net inflows (or conversely saw less outflow):

CIT: +$14.7BB (86%)

Fund: +$2.4BB (14%)

 

As a point of reference, 1Q19 saw a 63% CIT / 37% Fund split, so CITs saw more relative flow so far this year.  An issuer that has seen conversions from mutual fund to CIT structure is T.Rowe Price , who had a ~$5.0BB outflow from its mutual funds, but an offsetting ~$5.4BB inflow into its CITs.

 

Another major factor in the reduced overall flow this quarter is what we’ll call the ‘2020 effect’.

 

While vintages across the board saw a lower absolute inflow amount, the 2020 vintage saw massive redemptions as compared to other vintages and to 1Q19.  There are a couple reasons for that.  Someone who invests in a 2020 vintage expects their retirement year to be – you guessed it – 2020.  So now that we’ve crossed that threshold and these participants have retired (or will retire soon), a few different things could happen:

  • The participant closes out the 401k plan and moves to a different vehicle (self-directed IRA, annuity, etc.) causing a forced liquidation of the TDF
  • Some issuers have begun to convert the 2020 vintages into Income funds now that the retirement date has passed. In these situations, there would be an offsetting inflow into the respective Income vintage
  • Older investors nearing retirement begin looking at other management options outside TDFs (self-directed, professionally managed accounts, etc.)

Here is a table of 1Q19 vs 1Q20 flows:

 


Chart Source: Stadion

 

You can see in 2019, flows to the 2020 vintage were essentially flat, whereas this year saw a $8.2BB outflow.  We also saw a similar effect in the 2025 vintage, where flows went from 7.5BB during 1Q19 to flat this year.

 

One other interesting note regarding flows involves Vanguard , who had overall net flow of essentially zero.  While this seems somewhat a shock for the behemoth, digging a bit deeper it looks like at least a solid portion of the activity stemmed from Amazon’s $5.7BB 401k plan changing recordkeepers from Vanguard to Fidelity .  As competition between recordkeepers picks up, this could be an ongoing source of chunky flow between certain issuers.

 

All these moving parts can have a tremendous effect on TDF flows.  And as we (hopefully) put the market activity of the 1st quarter in the rearview mirror, it will be interesting to see how flows shake out for the rest of the year.

 

 

Avatar

Author: Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.

AUM FlowsTarget Date Funds
Avatar
Written By:

Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.


There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.

 

The commentary, analysis and opinions expressed are those of Stadion’s Investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.

 

This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Stadion’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.

 

Investors must make their own decisions based on their specific investment objectives and financial circumstances. Stadion Money Management, LLC (“Stadion”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.

 

©2019 Stadion Money Management, LLC. All rights reserved. Stadion and the Stadion S are registered service marks of Stadion Money Management, LLC. StoryLine is a service mark of Stadion Money Management, LLC.

 

SMM-052020-330