Target-Date Funds Have Taken Over 401(k)s. How They’re Constructed Continues to Evolve.

Vanguard and a handful of asset managers have dominated target-date funds, but PIMCO and other firms are growing their little slices of the pie.


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Target-date funds — usually a mix of stock and bond funds that adjust over time based on an investor’s current age and anticipated retirement year — continue to gobble up assets. But what’s inside them is slowly changing.

At the end of 2022, there were 60 million active 401(k) participants with $6.6 trillion in assets, and 59 percent of them were invested in target-date funds, according to the Investment Company Institute’s 2023 fact book. That percentage of investors, and the value of their target-date fund assets, are all but guaranteed to grow over time.

Target-date funds are a nearly unanimous default option for 401(k) plans, which means that if participants don’t choose their own investments, their plan automatically invests in a target-date fund on their behalf. And young workers appear to prefer the simplicity of target-date funds. Last year, 50 percent of 401(k) savers in their twenties were invested in target-date funds, compared to 28 percent of savers in their sixties, according to the ICI’s 2023 report. A 2023 BlackRock survey found that eight in 10 workplace savers who were not aware of target-date funds would be interested in investing in one.

Another example of target-date fund growth fortitude: In 2022, investors deposited a net $153 billion into target-date strategies, down slightly from $170 billion the previous year, according to a 2023 Morningstar report. The same year, the broader universe of mutual funds and ETFs had $370 billion in net outflows. It was the first year in which mutual funds and ETFs had recorded net outflows since Morningstar began tracking the data in 1993.

“It’s hard not to call them a phenomenal success, certainly from an asset-flow standpoint,” said Rene Martel, head of retirement at PIMCO. “And it doesn’t really show signs of slowing down.”

As the target-date fund market inevitably expands, so too will the assets under management and the fees collected by a short list of investment firms.

Vanguard, State Street Global Advisors, Fidelity Investments, BlackRock, and American Funds managed about 80 percent of the $2.82 trillion target-date fund market at the end of 2022. (The top 10 asset managers managed 93 percent.) Within that group, the Vanguard Target Retirement series is a distinct leader — in 2022, it took in more than $64 billion, nearly $44 billion more than the next highest series. According to Morningstar, the group’s dominance is likely to continue in the coming years.

But other asset managers are slowly growing their slices of the target-date fund pie.

When the first target-date funds emerged in the 1990s, they were primarily built using actively managed mutual funds. In the decades that followed, the rise of passive investing and ETFs changed target-date funds in the same way they did other investment portfolios. “The pendulum has swung like it has in other markets,” Martel explained, and the massive index-fund companies such as Vanguard and BlackRock have benefited.

But the pendulum has now begun to drift back in the other direction. More volatile markets, inflation, and the prospect of better investment performance have prompted managers to diversify the components of their target-date funds.

Other stakeholders support that evolution. Fifty-one percent of plan sponsors surveyed by BlackRock said that they value active management more than they did before due to recent volatility and performance. Retirement savers are also in favor of the shift; 62 percent said that hardships related to inflation and volatility have made their retirement goals less attainable, and after learning how actively managed strategies work, 79 percent said they would be interested in using them.

As more target-date funds contain a balance of passive and active funds, different asset managers are benefiting. At the end of 2019, PIMCO managed only $880 million in actively managed fixed income within target-date funds. Today, it manages more than $7 billion, Martel said.

PIMCO builds its own target-date funds, which include allocations to its own actively managed fixed income and Vanguard funds for passive equity exposure. PIMCO funds also are used by other target-date fund managers in a similar fashion, the company said.

PIMCO’s $7 billion in assets is a relatively small amount in the world of retirement accounts. Still, if the inclusion of some actively managed funds helps address the worries of retirement savers, their use will increase. Only 21 percent of employees are very confident that they’ll have enough money saved for the lifestyle they want in retirement, according to BlackRock’s survey.

“It’s pretty rare that the solution will be all assets in just passive or active, or one asset class, or one manager,” Martel said. “Typically, if you want an optimal solution, you’re going to have to combine a few things.”