Target-date fund 2020 sales in red as CITs rose, older workers fled: Report

Target-date mutual fund sales went negative in 2020, potentially for the first time in the products’ history.

Overall, the retirement savings products bled $6.7 billion, representing the first such instance of negative net sales since Morningstar began tracking them in 1994, according to a report this week from the ratings and research firm.

However, that figure does not give a complete picture of demand for target-date products. While investors' redemptions of target-date mutual fund were much higher last year than in recent history, for years sales have been shifting to collective investment trusts, particularly among large retirement plans, at the expense of target-date mutual funds. Over the past six years, CITs have more than doubled their market share of target-date products, according to Morningstar.

And one big reason for the net negative mutual fund sales is that one series was liquidated in December — the $10 billion KP Retirement Path series, according to the Morningstar report. Taking that event out of the picture, target-date mutual fund sales were net positive, albeit it at $3.5 billion, representing the lowest level since 2000, Jason Kephart, associate director of multi-asset and alternatives research at Morningstar, wrote in the report.

FLIGHT BY NEAR RETIREES

Much of the outflow occurred in funds with vintages close to their target retirement dates, potentially showing concerns among near retirees about their nest eggs in an extremely volatile year, for the stock market and life in general.

“This disconnect between the stock market and the economy … the fact that in the real world nothing has actually changed, with the pandemic — I could see a lot of people being worried about that,” Kephart said.

Redemptions from 401(k) plans as a result of provisions in the CARES Act almost certainly played a role, and pressure on workers at small businesses likely did as well, he said. Some evidence of the disproportionate impact on small businesses is seen in the different sales figures for fund providers. Vanguard, for example, saw its net sales for its Target Retirement mutual funds fall by 92%, going from $31.9 billion in 2019 to $2.7 billion in 2020, according to data from the report. Meanwhile, Fidelity’s Freedom Index Series became 2020’s best seller, with net sales increasing by 25%, at $12.5 billion in 2019 and $15.6 billion in 2020.

Vanguard, Kephart noted, has a more heterogenous customer base than most other fund providers, meaning that some of its fund investors were hit harder by the 2020 economy, feeling “the full range of a K-shaped recovery” more so than those employed predominantly at the large companies that are the typical customers for Fidelity and other asset managers.

“It definitely affected the small plans more,” he said. Many plan participants, even if they didn't take CARES Act loans or early distributions from their accounts, likely stopped making contributions, he said.

For example, BlackRock’s LifePath Index series, which is used mostly by large 401(k) plans, saw net sales decline by just 1%.

One other company that saw its target-date mutual fund sales fall dramatically was American Funds, which had net sales of $11 billion in 2020 versus $24.9 billion in 2019, a 56% decrease, according to the Morningstar data. However, that company was still the second-biggest seller, and it reportedly pulled in an additional $2.3 billion in net sales for target-date CITs.

Most of Vanguard’s target-date sales went into CITs, according to that company.

“In 2020, the majority of the flows into Vanguard Target Retirement series were directed to our target retirement trusts. As of Dec. 31, investors entrusted $19.1 billion in new flows to Vanguard Target Retirement series, inclusive of funds and trusts, and as you'd expect, a significant portion came from defined-contribution retirement savers,” a company spokeswoman said in an email. “Importantly, the client always comes first, regardless of flows. Our primary focus with the TRF series is to ensure our target retirement funds continue to meet investors’ needs and help them save for a secure retirement.”

Investment providers voluntarily disclose CIT data, and industrywide figures for 2020 were not yet available from Morningstar.

A WHIPSAW YEAR

One reason some near retirees likely fled from target-date funds was the market plunge in March. During the first quarter, target-date mutual funds on average saw negative returns of nearly 10%. Though many recovered during the second quarter 2020, the average return for the first six months of the year was still negative, at about -0.4%.

“When you have the market fall like it did in March, that gives people who thought they had a certain risk tolerance a wake-up call, especially if they are close to retirement,” Kephart said.

A potential change in target-dates in the future to more often include annuity components could change that, he said. “If you knew that 15% of your nest egg was in an annuity, maybe that would give you a little more confidence in sticking with [a target-date fund] during those volatile periods.”

With the market recovery during the second, third and fourth quarters of 2020, target-date funds saw strong net returns, the Morningstar data show. On average, vintages of 2045 and higher saw net returns of more than 15% for the full year, while those in near-retirement years saw net returns of 10% or higher.