Target-date funds hit $3.5T in record surge

Mutual funds narrowly maintained their lead over collective investment trusts, but CITs are growing faster, suggesting a potential shift in leadership this year.

Coming back from the challenges of 2022, target-date funds surged to an unprecedented $3.5 trillion in assets under management by the end of last year, according to a new report by Sway Research.

According to the firm’s report, “The State of the Target-Date Market: 2024,” target-date products saw a 22% increase in assets over the course of 2023.

Despite predictions that collective investment trusts would surpass mutual funds in the target-date space, mutual funds narrowly maintained their lead, with $1.76 trillion in assets compared to CITs’ $1.71 trillion. However, CITs experienced a more significant rate of growth in 2023, at 26% versus 19% for mutual funds, suggesting a potential shift in leadership this year.

“The race between CITs and mutual funds in the target-date market is indicative of broader trends towards cost efficiency and diversified investment strategies,” emphasized Chris Brown, founder of Sway Research.

On Sway’s leaderboard of target-date product providers, American Funds’ Target Date Retirement mutual funds climbed to third place among target-date series by vehicle, targeting only the CIT and mutual fund versions of Vanguard Target Retirement. Vanguard continued to dominate as it captured 37.1% of the market with target-date assets totaling $1.29 trillion.

The report also sheds light on the evolving landscape of target-date fund fees. In 2023, the average investor in a passive target-date fund paid only 9 basis points in expenses, a stark contrast to the 55 basis points for actively managed series.

“Lower fees are a significant factor in the growing appeal of target-date funds, offering investors more efficient ways to manage their retirement savings,” Brown added.

Compared to active and hybrid series, passive mutual fund target-date series outperformed on an asset-weighted return basis in 2023, highlighting the competitive performance of lower-cost investment options. Despite this, hybrid target-date funds showed the best three-year performance, albeit by a slim margin.

A medium-term decline in mutual fund target-date expenses, which have plummeted 41 percent since 2018, underscores a broader industry trend toward cost reduction.

That movement has been facilitated by the increasing concentration of assets among a few large providers, with the 10 largest controlling more than 94 percent of the market by the end of 2023. The critical role of fees in securing market dominance was evidenced by Vanguard’s commanding presence in the passive target-date space, where it holds a 61 percent asset share.

“As we move forward, the ability of asset managers to offer competitive fees will continue to shape the landscape of the target-date market,” Brown said.