Vanguard share of target-date fund market becoming 'obscene'

The fund giant has ridden the wave of investors seeking lower costs, primarily as a result of retirement-plan lawsuits

Mar 4, 2019 @ 2:05 pm

By Greg Iacurci

Vanguard Group extended its dominance over the target-date fund market last year as the flow of retirement assets into index funds continued unabated, with employers seeking to reduce the cost of their 401(k) plans.

Vanguard swelled its target-date assets by $26 billion in 2018, the biggest increase of any firm, according to Sway Research, which studies asset management distribution in retirement plans.

With $649 billion held in its target-date mutual funds and collective investment trust funds, the index fund behemoth now controls nearly 37% of the roughly $1.8 trillion market, according to Sway. The asset manager's market share has swelled five percentage points, from 32%, in the last three years.

Fidelity Investments and T. Rowe Price, the second- and third-largest TDF providers, respectively, behind Vanguard, saw their market shares decline over the same time period. Fidelity's decreased three points to 13.9%, and T. Rowe's fell two points to 12.6%, according to Sway.

Meanwhile, Vanguard's share of passively managed TDFs — those whose underlying investments are primarily index funds — sits at nearly 70%.

"Their share of passive assets is obscene," said Chris Brown, founder and principal of Sway Research.

Vanguard and other index-focused providers, such as BlackRock Inc. and State Street Global Advisors, have ridden the trend of passive investing in retirement plans and the broader market as investors seek lower costs.

The slew of lawsuits targeting employers for excessive 401(k) investment and administration fees have concerned plan sponsors, Mr. Brown said. In addition, the Labor Department's fiduciary rule, parts of which went into effect in 2017 but which was subsequently killed in court, caused plan sponsors and their advisers to focus more keenly on their fiduciary responsibilities.

"It's hard to see much changing this right now," Mr. Brown said of the trend toward index TDFs. "The focus is still so much on fees right now."

(More: Investor confusion about target-date funds is alarming)

Vanguard's target-date mutual fund fees are among the industry's lowest, at a cost of 0.09% on an asset-weighted basis for its Vanguard Institutional Target Retirement funds, tied with SSgA's Target Retirement funds, according to Sway data. Only Charles Schwab's Target Index funds are cheaper, at 0.08%.

By comparison, the cheapest actively managed target-date mutual fund costs 0.51%, for TIAA-CREF's Lifecycle funds.

Also working against active funds right now is the fact that they performed worse last year, on an asset-weighted basis, than index TDFs, even though the stock market was down — an environment in which active managers are thought to show more relative value.

Passive TDFs returned an average -6.18% in 2018, compared with -6.56% for active funds, according to Sway. The S&P 500 was down 6.2% last year.

Passive TDFs now have better one-, three- and five-year asset-weighted returns than active TDFs, a reversal from a year ago. Those statistics could accelerate the flow of TDF assets from active to passive funds, Mr. Brown said.

(More: Fidelity faces Galvin inquiry over fees charged for 401(k) plans)


What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Featured video


What is causing the fever for RIA deals?

Deputy editor Bob Hordt and senior columnist Jeff Benjamin discuss factors adding fuel to the M&A fire in the independent advice space.

Latest news & opinion

Merger mania: Why consolidation in the RIA space is about to explode

The pace is expected to pick up as big firms seek to get even bigger and older advisers look to cash out.

Voya Financial Advisors exposes more sensitive adviser information on its website

List of top advisers at the firm comes after Social Security numbers were put at risk.

Securities America hit with lawsuit seeking $18 million in damages

Firm is dealing with the fallout from a rogue broker it fired a year ago.

Brian Block continues his legal fight to stay out of prison

A judge denied Mr. Block's motion for a new trial, but he wants another day in court.

10 social media stars you're not following yet, but should be

Some of the great people using social media to discuss wealth management and financial advice who might not be on your radar.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print