Target-date fund sales back up after a dip in 2020

Target-date mutual funds saw their sales rebound in 2021, a year after the products experienced their first period of net redemptions.

Last year, U.S. target-date mutual funds had net inflows of $23.9 billion, a significant increase from the $6.7 billion in outflows seen in 2020, according to a report late last week from Morningstar.

The prior year’s negative sales were largely attributable to the pandemic, with some investors pulling money from target-date funds amid the uncertainty. But one product, the $10 billion KP Retirement Path series, had liquidated in December 2020, which put overall sales into the red — otherwise they would have been just slightly positive.

Still, sales last year were down from nearly $60 billion in 2019 and the record $69 billion set in 2017, Morningstar manager research analyst Megan Pacholok wrote in the report last Thursday.

Even then, the figures come with a disclaimer: They don't include flows for collective investment trusts, the vehicles that have been accounting for a bigger chunk of sales every year.

“It’s really half the picture right now, because we don’t have that CIT data,” Pacholok said.

CIT providers disclose sales figures voluntarily in many cases, as the products do not have the same public reporting requirements as mutual funds.

Across the industry, some fund providers have been pulling the plug on their 40 Act target-dates, focusing instead on CITs. The institutional products have been gobbling up assets in 401(k) plans, and they are increasingly available to smaller retirement plans.

The biggest target-date fund provider, Vanguard, isn’t among the top 10 sellers for 2021, a result of more money flowing into its CITs. Nearly 100% of that company’s net target-date sales, $55 billion, went into CITs, while its sales for the mutual fund versions were flat, according to Morningstar. Those sales were higher than those of the top two target-date mutual fund series combined, the Fidelity Freedom Index and American Funds Target Retirement products, Pacholok wrote.

“Vanguard continues to hold its large presence in the target-date space, especially since other providers tend to not have as strong of flows to their CIT versions of their target-date funds,” the report read.

The Fidelity Freedom Index series pulled in $26 billion last year, up from $15.6 billion in 2020, according to Morningstar. Meanwhile, the American Funds series raked in $23.9 billion, compared with $13.5 billion the year prior.

The third-highest selling series in 2021 was BlackRock’s LifePath Index line, at $5.3 billion, followed by TIAA’s Lifecycle Index series, at $4 billion.

But there was another notable change in the sales leaderboard for 2021: Two of the series on the list — the American Funds series and the T. Rowe Price Target series — exclusively hold actively managed funds as their underlying investments, Pacholok said. Last year, only one active-only series, the American Funds line, was on the top 10 list. The T. Rowe line, at 10th by sales, brought in $570 million.

Industrywide, money is predominantly going into target-date series composed of index funds or a mix of active and passive funds, as a result of the lower fees associated with those products, Pacholok noted. The American Funds series is a notable exception, and its performance history is the reason for that — its net returns over 10 years have beat 97% of peers, according to the report.