Indexed target date funds hitting the mark with plan sponsors

Indexed target date funds hitting the mark with plan sponsors
Employers seeking lower fees, less volatile results through passive management
MAY 21, 2012
Target date funds favoring indexed strategies may hold fewer assets than their actively managed counterparts, but plan sponsors are becoming more intrigued by the offerings. The numbers still favor active managers: Target date funds that use active management hold close to $300 billion in assets under management, nearly three times the amount that's currently held in series that use indexed, passively managed strategies, according to Morningstar Inc.'s 2012 industry survey of target-date funds. However, assets are pouring into passive series at nearly twice the rate of their actively managed cousins. Last year, passive target date funds grew by 19%, while the active series grew 11%. There are several factors behind that rising interest in these funds. “Plan sponsors are looking for different options, particularly fund lineups with lower tracking error and less volatility compared with actively managed funds,” said Josh Charlson, a senior mutual fund analyst at Morningstar and co-author of the report. The cost equation is another motivation as index-based offerings have lower costs and fees continue to exert competitive pressure in the target date fund industry, he said. Indeed, providers are answering plan sponsors' calls for greater selection in the passively managed target date arena. John Hancock Funds LLC and BlackRock Inc. are among the providers who recently launched passively managed offerings. Fidelity Investments and TIAA-CREF experienced growth in their passive strategies last year, Mr. Charlson said. He believes large plan sponsors who work with consultants are leading the charge in asking for passive strategies, as opposed to smaller plans that work with financial advisers. Another interesting finding from the survey: Even though target date funds came under criticism for using “through” glide paths that didn't reach their most conservative allocation until after retirement, providers are still adding funds that use this method. Back in 2011, 22 out of the 41 glide paths Morningstar studied in its survey invested “through” retirement. Only 19 invested “to” retirement — that is, they reached the most conservative allocation at the target date. This time, out of 46 glide paths analyzed, 28 were in the “through” side, and only 18 were structured “to” retirement.

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