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4th Quarter and 2020 TDF Flows

As we continue to move on from a rough 2020, it is interesting to look back at Target Date Fund (TDF) flows to get a glimpse into how participants saved for retirement or unfortunately failed to save or, even worse, took withdrawals. While this glimpse does not give the total picture due to other investments available in retirement plans, we can still glean some interesting intel from TDF flows, both at a savings level and how the TDF industry continues to shift and morph.

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By Clayton Fresk on January 27, 2021



As we continue to move on from a rough 2020, it is interesting to look back at Target Date Fund (TDF) flows to get a glimpse into how participants saved for retirement or unfortunately failed to save or, even worse, took withdrawals.  While this glimpse does not give the total picture due to other investments available in retirement plans, we can still glean some interesting intel from TDF flows, both at a savings level and how the TDF industry continues to shift and morph.

 

This first chart shows the total TDF industry size, as well as asset flow information and organic growth rates.


The blue bar indicates how the overall TDF industry grew rather significantly from 2019, but this growth was fueled by performance rather than from contribution activity.  The organic growth rate—i.e. net inflow for the year divided by previous year ending AUM–  for 2020, indicated by the gray line, was a paltry 1%, as compared to 10% in 2019.

 

Because unemployment, and the fear of such, grew significantly during 2020 due to Covid-19, it is not shocking that contribution activity would have waned. Unfortunately, rather than participants simply pausing their activity, it also appears that withdrawal activity was on the rise as well. Here is a breakdown of net flows by vintage for each quarter during 2020.


For the first three quarters, flows looked normalized as longer-dated vintages had inflows and those closer to or in retirement having outflows.  However, the 4th quarter proved different, as vintages as far out as 2050 experienced outflows.  As I stated, this does not necessarily mean all the money was removed from retirement accounts, as participants may have just changed investment vehicles (do-it-yourself, retirement managed accounts, etc.).  However, given the state of uncertainty we have seen in the economy, it seems safe to say much of the outflow was withdrawal related.

 

Now we will look at some industry level stats.  We have mentioned before that the TDF market is shifting its vehicle of choice from Mutual Funds to Collective Investment Trusts (CITs).  The 4th quarter, as well as 2020 as a whole, saw this shift continue:


Overall, CITs now represent 41.0% of all TDF industry assets, up from 39.7% at the end of 2019.


We have also seen the TDF market shift away from Active TDFs towards Passive or Blended TDFs, and again we saw this trend continue in the 4th quarter and in 2020:


This active number could be much worse if not for American Funds, who continues to buck the trend and have strong traction in their active TDF offering:


(Digging a tad deeper, TransAmerica recently came out with a ~$900MM TDF series that is mostly an American Funds clone.  So, about ½ of the ‘other’ inflow could be attributed to American Funds as well!)

 

We also see an ‘American Funds’ effect when looking at YTD 2020 flow by fee range.


As you can see, TDFs with fees of 10 basis points (bp) or less took in $74BB last year, with TDFs with 20bp or higher fees experiencing outflows.  Here you can see the American Funds effect in the 0.31-0.40 range (where most of their Assets Under Management –AUM– lie).  That fee range lost $3.8BB when taking American Funds out of the equation vs gaining 9.9BB with them included.

 

Here is a side-by-side comparison of 2019 vs 2020 market share for each fee range:


So TDFs with a fee of 10bp or less now have a 42.2% market share, up decently from last year.  This looks to be funded mostly from TDFs in the 0.51-0.70bp range.

 

This race-to-zero fee compression seems likely to continue accelerating in 2021, as both Vanguard and Fidelity recently announced reduced minimums on certain (cheaper) share classes from $100MM to $5MM.  Additionally, as more market participants seem to be moving to cheaper options (Mutual Funds to CITs, active to passive, moves to cheaper share classes, etc.), this will only aid
the trend.

 

Finally, we will break this down to as issuer level.  We limited this analysis to issuers with $20BB or more in their TDF suite.  These 12 issuers account for 95% of the AUM in the industry.

A few notes of interest:

  • A good number of these issuers offer a mix of active/blend/passive options.  While some remain fully (or large majority) in only passive options, two continue to offer only active TDF options (American Funds and American Century)
  • In terms of Active flow, only American Funds experienced positive flow.  However, many of these who experienced negative active flow had offsetting positive flows in blend/passive, indicating market participants switching from one offering to the other.  Fidelity led the charge on the active-to-passive switch, but JPMorgan, TIAA, and Schwab also saw similar moves.
  • BlackRock barely beat out Vanguard for overall inflows on the year, with American Funds coming in a close 3rd.  Fidelity and SSgA were neck-and-neck for 4th and 5th place. T. Rowe Price was on the other end of the spectrum, seeing decent outflows in their predominantly active offering.
  • Vanguard was able to cross the $1 Trillion threshold with flows and investment returns pushing them over the edge.  They continue to lead the way in AUM with a 37% market share.

Although 2020 performance was outstanding and wound up being a perfect lesson in the resilience of markets and the value of investing for the long haul, issuers of TDFs and other retirement investment vehicles must always keep an eye on the first items to impact the bottom line: participant contributions and withdrawals.

With fee compression now reaching dizzying lows—and, by extension, perhaps unwittingly and incorrectly implying that all investment paths are equal and appropriate for all investors—we feel it is important to remember that 2020 was, in many ways, a unicorn year that is unlikely to be repeated. Without regular contributions, and very minimal withdrawals over an account’s lifetime, even magnificent performance will eventually lead to less-than-desired outcomes when approaching retirement.

 

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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.

20204Q20asset managementAUM FlowsBull MarketCITTarget Date Funds
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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.


A target-date fund is a class of mutual funds or ETFs that periodically rebalances asset class weights to optimize risk and returns for predetermined time frame.

 

A Mutual Fund an investment program funded by shareholders that trades in diversified holdings and is professionally managed.

 

A Collective Investment Trust (CIT) is a group of pooled accounts held by a bank or trust company. The financial institution groups assets from individuals and organizations to develop a single larger, diversified portfolio.

 

A Basis Point (BP) is a unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.

 

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