Target date fund costs continue decline, thanks to competition, new low-cost funds

Target-date fund expense ratios continued their steady decline, falling to 78 basis points in 2014 on an asset-weighted basis vs. 84 basis points in 2013, according to the latest annual survey of target-date funds published Tuesday by Morningstar Inc.
Last year’s decline represented the sixth consecutive decrease since the financial research firm began tracking target-date fund expenses. In 2008, the average asset-weighted expense ratio was 104 basis points.
The steady decline is due to several factors, including competition among target-date fund providers and investors moving to lower-cost target-date funds, said Janet Yang, director of multiasset class research, in an interview. Other reasons for the overall fee decline include fee waivers issued for some target-date funds, the introduction of several lower-priced target-date series and the liquidation of a few high-priced target-date fund series, Ms. Yang added.
(More: Few target date fund managers eat their own cooking)
Fees could continue falling if fund managers keep offering more index-based target-date funds, she added.
Morningstar’s survey counts mutual-fund and exchange-traded fund versions of target-date funds but excludes collective trusts. The Morningstar target-date universe includes assets in retirement accounts and in taxable accounts.
In a report describing the survey’s results, Morningstar reported that target-date fund assets grew at an 8% organic rate last year, adding $49 billion in estimated net flows. Organic growth reflects inflows, but it excludes market appreciation.
“That growth is a come-down of sorts from recent years when annual organic growth consistently exceeded 10%,” the report said.
(More: In target date funds, performance starts to trump risk management as assets balloon)
The report also said index-based target-date funds produced organic growth of 9.8% last year, vs. 7% for actively managed target-date funds. “The differential has narrowed over the years,” the report said.
The report noted that three target-date fund providers continue to dominate the market: Vanguard Group with 27.3% of target-date mutual fund assets; Fidelity Investments with 26.5%; and T. Rowe Price Group with 17.3%.
But the Big Three’s aggregate market share is shrinking a bit. Last year, they accounted for 71.1% of target-date mutual fund assets. In 2009, their market share was 77.1%.
(Robert Steyer is a reporter at sister publication Pensions & Investments.)