Morningstar Announces Findings from 2013 Target-Date Series Industry Survey

Chicago, IL - 27 June 2013

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced findings from its Target-Date Series Research Paper: 2013 Industry Survey. Key findings of the industry survey are:

  • Average industry glide paths--the outline of a target-date fund's changes in its stock and bond balance over time--should reasonably meet the typical worker's spending needs in retirement.
  • More target-date assets are shifting to passively managed investments, as both an underlying holding within a portfolio and as an overall investment approach. While 68 percent of target-date assets were in actively managed series as of Dec. 31, 2012, inflows to passively managed series--those that invest 80 percent or more in passively managed investments--surpassed flows into actively managed series for the first time for the 2012 calendar year.
  • Managers of target-date series have significantly increased allocations to non-U.S. equities. Since 2005, international stocks have risen from 24 percent of the average 2040 fund's equity allocation to 36 percent, as of Dec. 31, 2012. Emerging-markets bond funds appeared in nine target-date series in 2008, compared with 18 in 2012.
  • Target-date series have become established fixtures in defined contribution plans: assets are rising, fees are falling, and performance reflects strong broad market trends.

Josh Charlson, Morningstar's fund-of-funds strategist and the study's lead author, said, "We found that target-date funds with significantly different asset allocations deliver similar retirement savings outcomes up to age 85. And as the target-date industry matures, we see an increase in diversification of the underlying investments in terms of both fund strategy and geographical location. Though the asset allocation or fund selection among target-date investments vary, target-date funds are relatively suitable investments for retirement savings. Investors realize that, too, and continue to put their money in these funds."

Using Monte Carlo analysis, which simulates thousands of possible allocations that a glide path could take, Morningstar tested the likelihood that investors will be able to successfully retire. Morningstar defined success as whether or not an investor's savings would last through retirement. The test used a uniform set of inputs along with a hypothetical scenario of an average U.S. investor, based on common assumptions of salary, savings rate, and expected retirement age. Morningstar compared glide paths that shift their asset allocation "to retirement"--when a target-date fund discontinues asset allocation adjustments when the retirement date is reached--and those that continue to shift "through retirement"--when a target-date fund continues to shift its allocation more conservatively after the retirement date is reached. The research concluded that target-date investors in different series have similar probabilities of accumulating sufficient savings, at least through age 85.

Additional findings from the industry survey include:

  • Assets in target-date series crossed the $500 billion mark in the first quarter of 2013. While the industry's organic growth rate has slowed, its growth is still competitive with other broad mutual fund asset classes.
  • Fees continue to fall, as the asset-weighted average expense ratio dropped to 0.91 percent in 2012 from 0.99 percent in 2011.
  • The industry's market leaders--Vanguard, Fidelity, and T. Rowe Price--still control about three-fourths of the industry's assets, despite impressive growth from some of the industry's smaller players. Meanwhile, four target-date series shuttered in 2012: American Independence, Columbia, Oppenheimer, and Goldman Sachs.

Morningstar also publishes Morningstar Analyst Ratings(TM) and reports for the largest target-date series. The company determines an Analyst Rating for target-date series by evaluating five key pillars--Process, Price, Performance, People, and Parent--in addition to unique quantitative metrics. The ratings are assigned on a five-tier scale: Gold, Silver, Bronze, Neutral, and Negative. The top three tiers represent positive ratings. Morningstar's Analyst Ratings and in-depth reports for target-date series are available in global investment analysis platform Morningstar Direct(SM) and investment planning and research platforms Morningstar Office(SM) and Morningstar® Advisor Workstation(SM). The Analyst Ratings and one-page reports for target-date series are available on individual investor website Morningstar.com®.

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