Target-date funds received $153.3 billion in net inflows in 2022, of which $121 billion flowed into collective investment trusts, with mutual funds receiving $32.3 billion, despite high market volatility, according to news release Tuesday from Morningstar.
Morningstar's Target-Date Strategy Landscape report, issued in conjunction with the news release, noted that the 2022 net inflow figure for target-date funds was down from $170 billion in 2021; however, the broader universe of mutual funds and ETFs had $370 billion in net outflows 2022, marking the first time that both mutual funds and ETFs suffered net outflows since Morningstar began tracking such data in 1993.
"To see target-date investors largely stay the course through the down market is a sign that these strategies are being used as intended, as long-term investments," said Megan Pacholok, senior manager research analyst at subsidiary Morningstar Research Services, in the news release.
Morningstar's report also found that total target-date assets fell by 13.8% to $2.82 trillion at the end of 2022 from a record high of $3.27 trillion at the end of 2021, largely due to market depreciation.
Collective investment trusts, which are tax-exempt, pooled investment vehicles exclusively for qualified retirement plans, accounted for 47% of all target-date strategy assets as of the end of 2022, a 10% jump from the end of 2018. As a result, Morningstar said in the report that CITs are on pace to overtake mutual funds as the most popular target-date vehicle within the next two years.
Plan sponsors, the report said, continue to display a "strong preference" for lower-cost target-date strategies, as shown by the growing popularity of CITs.
In addition, more than $56 billion in target-date mutual funds converted to CITs in 2022 — almost triple the figure from 2021. "Plan sponsors typically stay with the same investment strategy, but switch investment vehicles to lower fees when they convert," Morningstar said in the report.
Moreover in 2022, the report noted, Vanguard Target Retirement series, the largest target-date strategy, saw its CIT assets surpass its mutual fund assets for the first time. At the end of 2022, 51% of Vanguard's target-date assets were in its CIT version.
On the whole, including both mutual fund and CIT versions, the Vanguard Target Retirement series took in more than $64 billion of net inflows in 2022, far ahead of the $20.4 billion of net inflows recorded by the second-place State Street Target Retirement series.
Vanguard Target Retirement series has about $1.1 trillion in total assets under management, a Vanguard spokesman said in an email.
The report also indicated that investors far preferred lower-cost options among target-date funds. In 2022, target-date mutual funds in the cheapest quintile received more than $54 billion in net inflows, while the three most expensive quintiles recorded a total of $28.5 billion in net outflows for 2022.
