The Markets March 28, 2023

TDF Assets Fell 14% in ‘22, but Inflows Stayed Strong

While market depreciation drove TDFs off a record '21, inflows stayed strong, according to Morningstar.

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Market depreciation drove a roughly 14% drop in target-date-fund assets in 2022 to $2.82 trillion, according to data released Tuesday by Morningstar.

The decline came off a record year for TDFs in 2021, when the investment vehicles popular in retirement plans hit a record high $3.27 trillion, Morningstar stated in its annual report on target-date strategies.

Despite the market challenges, net inflows for TDFs remained strong at $153 billion for the year, down from $170 billion in 2021, according to Morningstar. While down on the year, that performance was far better than the broader universe of mutual funds and ETFs, which had net outflows of $370 billion, the first year with new outflows since Morningstar started tracking the data in 1993.

The inflows to TDFs continued even as their broad diversification was tested in 2022, with defensive assets—such as investment-grade bonds and Treasury inflation-protected securities—suffered losses due to interest-rate hikes by the Federal Reserve, Morningstar noted.

“2022 was a bit of a difficult market,” says Megan Pacholok, senior manager research analyst at Morningstar Research Services. “We did see outflows when you are measuring the total ETF and mutual-fund universe, so to see continued inflows into TDFs shows that investors are keeping the course.”

CITs Dominate

Another key trend was a continued push into collective investment trust TDFs, which are only available within retirement savings plans and generally offer lower fees, Pacholok notes. About $121 billion—or 79% of all inflows—went into CITs, putting the investment vehicle on pace to overtake mutual funds as the most popular target-date vehicle in the next two years.

The generally low fees for CITs have pushed them to make up 47% of all target-date-strategy assets as of the end of 2022, according to the report. For large plan sponsors, the pooled investment vehicles may even be offered at an even lower fee threshold, according to Pacholok.

“If you are a large plan sponsor and you are seeing some of these TDFs are already at a low price tag, and you can get an even better deal if you choose a CIT, who is not going to go for that?” she says.

Fees also matter across all TDF offerings, Pacholok says, noting that the two cheapest quintiles of target-date share classes drew $60 billion in 2022, and the three most expensive quintiles posted $28.5 billion in outflows.

Some of the lower-fee attraction is attributable to lawsuits against plan sponsors that target TDF strategies in excessive-fee cases, Pacholok notes. More recently, however, the researcher has seen a flurry of legal complaints focused on performance, meaning plan sponsors may start shifting toward performance-chasing, a tactic Pacholok says could be dangerous for investors in the long run.

“Just because it’s done well one year doesn’t mean it’s going to do well the next year,” Pacholok says. “Past performance is not an indicator of future performance.”

ESG Opportunity

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The Morningstar report noted the potential for environmental, social and governance target-date series has broadened after the Department of Labor’s rule to allow ESG strategies as a qualified default investment option survived a Congressional attempt to remove it, according to Morningstar.

Pacholok says that, while she is skeptical of widespread uptake, seeing ESG-focused TDF options come to market from players like Putnam Investments this year—joining earlier movers such as BlackRock—makes her anticipate others joining in.

“I think it’s something we should keep an eye out for, because it has potential to grow,” she says. “But if you’re a plan sponsor, I wouldn’t imagine that you would want to select a series, then have to switch out in a year. … They are looking for more of a consistent offering that they can keep their investors in.”

In terms of fund providers, Vanguard Target Retirement collected the most net new money in 2022 when accounting for both mutual fund and CIT flows. At the end of 2022, 51% of Vanguard’s target-date assets were in CITs, marking the first time they surpassed the mutual-fund version at Vanguard, Morningstar said.

American Funds Target Date Retirement saw the most inflows for target-date mutual funds. The popularity for the actively-managed mutual fund continued due to “strong long-term performance and competitive fees,” while other active-based target-date strategies struggled to gain assets due to generally higher fees, according to Morningstar.

The research showed that a handful of asset managers still dominate the target-date market. The top five providers are, in order: Vanguard (36%), Fidelity Investments (14%), T. Rowe Price (11%), BackRock (9%) and American Funds (8%).

Compliance March 28, 2023

Proposed Legislation, SEC Rule Would Greatly Expand Electronic Disclosures

A proposed bill and an SEC proposal on the same topic target two different audiences.

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Proposed legislation, the Improving Disclosure for Investors Act, would require the Securities and Exchange Commission to allow certain registrants to send electronic disclosures to investors instead of paper disclosures. The bill aims to build off an SEC proposal which would require certain registrants to submit disclosures to the SEC electronically, but not to investors.

The bill was proposed yesterday by Representative Bill Huizenga, R-Michigan, and is co-sponsored by House members Bryan Steil, R-Wisconsin; Jake Auchincloss, D-Massachusetts; and Wiley Nickel, D-North Carolina.

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A spokesperson for Huizenga’s office confirmed that the primary difference between the legislation and the SEC’s rule proposal is the legislation applies to disclosures to investors, whereas the proposal applies to disclosures to the SEC.

If passed, the bill would require the SEC to create rules that allow, but do not require, investment companies, business development companies, brokers, dealers and municipal securities dealers to disclose their prospectuses, semiannual and annual reports, account statements and proxy statements to their investors electronically.

The bill would require the SEC to issue rules that provide for an initial paper communication informing the investor of the electronic delivery and an annual paper notice for two years informing them of their right to opt out of electronic delivery. The SEC would also be charged with requiring the registrant to enact policies to identify and fix failed electronic disclosures and provide a mechanism for opting out.

If the SEC did not make regulations to this effect within one year of the bill’s passage, the law would take effect anyway, and covered entities would take the law as written for guidance on electronic disclosure.

According to a press release from Huizenga’s office, “the SEC currently permits electronic delivery of certain documents under the federal securities laws,” but this process is “opt-in” rather than opt-out.

The SEC Proposal

Last week, the SEC proposed requiring certain registrants to file disclosures to the SEC using the electronic EDGAR system. According to the SEC’s press release:

“The proposed amendments would require the electronic filing, submission, or posting of certain forms, filings, and other submissions that national securities exchanges, national securities associations, clearing agencies, broker-dealers, security-based swap dealers, and major security-based swap participants make with the Commission.”

The comment period for this proposal will stay open until May 22 or 30 days after its entry into the Federal Register, whichever is later.

SEC Chairman Gary Gensler said in a statement that the proposal “would require entities under the Exchange Act to file electronically a range of annual and quarterly forms currently filed in paper. For example, brokers and other filers would need to submit electronically their annual audit filings and risk assessment reports. Streamlining the Commission’s filing and processing, this also would help us more quickly analyze filings to ensure compliance with Congress’s laws and our rules.”

SEC Commissioner Mark Uyeda supported the proposal and invited public comments on its specifics, saying, “The list of rules and forms affected is long and the Commission may not have gotten this transformation exactly right. For that reason, the assistance of investors and other stakeholders in providing us with their comments will be important.”

 

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