Vanguard extends TDF dominance with 'unbelievable' growth

Its target-date assets have grown by $270 billion since 2015

Mar 6, 2018 @ 2:44 pm

By Greg Iacurci

Vanguard Group has extended its grip on the target-date-fund market over the past few years, as attention to low costs and passive management continues to offer substantial tailwinds for the fund giant.

Vanguard controlled $623 billion in total TDF assets at the end of 2017, including assets held in mutual fund and collective investment trust funds, according to a new target-date report published by Sway Research, which studies asset management distribution in retirement plans. That's roughly $400 billion more than its closest competitors, Fidelity Investments and T. Rowe Price, and represents a 36% share of the approximately $1.7 trillion in target-date mutual funds and CITs.

In fact, Vanguard increased its TDF assets by $270 billion since 2015, according to the report, which is more money than Fidelity, the second-largest provider, manages in total. Fidelity oversees $244 billion.

"The asset growth has been unbelievable," said Chris Brown, founder and principal of Sway Research. "It's a combination of low fees, solid returns and strong brand name."

As a testament to brand strength, Vanguard is the No. 1 preferred manager of target-date portfolios among retirement plan advisers and consultants, according to a separate study conducted last year by Sway.

Top 10 TDF managers by assets under management
Company Total AUM* Total market share** Mutual fund assets CIT assets
Vanguard Group $623 36.0% $381 $242
Fidelity Investments $244 14.1% $227 $17
T. Rowe Price $232 13.4% $168 $64
BlackRock $140 8.1% $18 $122
American Funds $89 5.1% $89 N/A
J.P.Morgan $87 5.0% $53 $33
Principal $60 3.5% $26 $34
SSgA $44 2.6% $4 $40
TIAA $44 2.5% $44 N/A
American Century $24 1.4% $19 $5
Notes: *Figures in billions of dollars as of end-2017. **Market share includes mutual fund and CIT assets. Figures exclude assets in custom products.
Source: Sway Research

The firm is known for its low-cost, passive investment management, overseeing index funds that track the returns of a broad market index like the S&P 500. TDFs using index funds as underlying investments, as opposed to those employing active stock-picking strategies, are often less costly.

Plan sponsors and advisers have become more sensitive to investment fees, largely due to 401(k) litigation that has targeted primarily large employers for excessive fund fees.

Target-date mutual funds using active management have an asset-weighted expense ratio of 0.71%, while those with passive management have expenses of 0.15%, according to Sway data.

Charles Schwab, however, beats Vanguard on price — its Target Index funds carry a net asset-weighted expense ratio of 0.08%, while the Vanguard Institutional Target Retirement funds come in at 0.09%.

Some active managers have taken steps to make their funds more attractive from a cost perspective, including launching investment strategies in a collective-trust vehicle, which is only available to retirement plans and often comes with a lower fee than their mutual funds.

American Funds, owned by Capital Group, is a manager that has bucked that trend. Not only is the company a rare exception in that it doesn't have a target-date CIT (it only has mutual funds), the active manager has experienced the fastest annualized TDF growth rate (58%) when compared with the largest TDF managers since 2015, according to Sway.

American Funds, the No. 5 TDF provider by assets, manages $89 billion, up from $35 billion in 2015. It also has a strong brand among retirement plan advisers, ranking as their No. 3 preferred TDF manager, according to Sway data.

American Funds, like Vanguard, also has a record-keeping product. Record-keeping platforms serve as a lucrative distribution outlet for asset managers. Despite the emerging recognition by some plan sponsors and advisers of fiduciary concerns associated with using funds provided by the record keeper, such firms still control roughly 85% of the TDF market.

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