Assets in target date mutual funds have tripled since 2008, according to the Investment Company Institute, going from $160 billion at the end of that year to $481 billion at year-end 2012. Concurrently, expenses have dropped.
The median expense ratio for those funds fell from 118 basis points (1.18%) to 104 basis points (1.04%), down almost 12%, while the asset-weighted average expense ratio declined from 67 basis points (0.67%) to 58 basis points (0.58%) in that four-year period, down more than 13%.
While some of the asset increase resulted from appreciation since the 2008 financial crisis, other factors contributed to this triple play:
- Target date mutual funds offer diversification across asset classes and automatic rebalancing according to a changing risk profile. As the IRI notes, these features are especially appealing to for individuals saving for retirement in 401(k) plans and IRAs. As of last December, 91% of target date mutual fund assets were held in IRAs and defined contribution plans.
- Target date funds are often a default option for 401(k) plans under the Pension Protection Act of 2006. Newly-hired employees have been more likely to invest their 401(k) contributions in target date funds. For example, at year-end 2011, 40% of the account balances of recently hired participants in their 20s was invested in target date funds, compared with 35% in 2010 and 16% in 2006.
Year-end 2012 data will be published later this year, Sarah Holden, senior director of retirement and investor research at ICI, told On Wall Street. The increase is a continuation of a trend that weve seen for quite a few years. Those numbers are dollar-weighted averages; the share will reflect changes in market value of the target date fund assets in addition to net purchases of such funds. The snapshot for year-end 2011 had more plans offering target date funds (72%) compared with year-end 2010 (70%). Holden added that target date funds, in this context, include mutual funds, bank collective investment trusts, separately managed accounts and other pooled investment products.
As for the decline in expense ratios, at least two factors played a role. First, total assets in these funds have soared, as noted. Second, a greater concentration of assets in lower-cost target date mutual funds pushed down the average expense ratio paid by investors.
Last year we saw economies of scale at work in the declining level of expenses that target date fund investors paid, as the assets invested in these funds continued to grow, Sean Collins, ICIs senior director of industry and financial analysis, said in a statement. This study also shows that investors gravitate toward the least costly target date funds. In 2012, ICI pointed out, more than three-quarters of target date mutual fund assets were concentrated in funds with expense ratios in the lowest quartile.
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