Vanguard reclaims top target-date fund manager spot, leapfrogs Fidelity and BlackRock

Vanguard Group captured the most new investor money in its target-date funds last year relative to other asset managers, reclaiming the top spot it’d held for over a decade before being dethroned in 2020, according to a new Morningstar report.

Target-date funds, or TDFs, have become popular in 401(k) and other workplace retirement plans over the last decade and a half. Investors select a fund whose date best approximates their likely year of retirement; the fund gets more conservative as investors near retirement age, shifting from stocks to bonds.

Many employers use the funds as a de facto investment for employees who are automatically enrolled in a 401(k) plan.

TDFs raked in $170 billion of new contributions in 2021, an annual record, according to Morningstar. Total fund assets approached $3.3 trillion, up almost 20% from 2020.

Investors have been shifting toward lower-cost funds for years. Vanguard, which has branded itself as a low-cost provider, and other popular TDF managers have capitalized on the trend.

Retirement savers invested a net $55 billion in Vanguard’s Target Retirement Funds in 2021 — almost a third of all the money that flowed into TDFs, according to Morningstar.

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Fidelity Investments’ Freedom Index Funds, the firm’s most popular flavor of TDFs, pulled in $45 billion, ranking second. (The total was a smaller $35 billion across all Fidelity’s target funds, because investors withdrew money from its flagship Fidelity Freedom series, according to Morningstar.)

BlackRock‘s LifePath Index funds collected $25 billion of net money in 2021, ranking third, Morningstar said.

BlackRock and Fidelity had the No. 1 and No. 2 spots in 2020, respectively.

“Vanguard had held the top spot since 2008, but took a dip [in 2020],” said Megan Pacholok, an analyst on Morningstar’s multi-asset manager research team and co-author of its annual target-date report, published Wednesday. “This year, they climbed to the top again.”

The three money managers have among the lowest-cost target-date funds.

In 2020, BlackRock, Fidelity and Vanguard captured about $22 billion, $19.8 billion and $19.5 billion in their most popular TDFs, respectively.

The Covid-19 pandemic likely played a big role in the scramble atop the leaderboard, Pacholok said.

“We believe it’s primarily because of the market drawdown in 2020,” she said. “People were a little more hesitant to keep up with their contributions.”

A BlackRock spokesperson declined comment.

“The Freedom Funds were launched in 1996, making Fidelity one of the only providers with a demonstrated track record that extends over 25 years,” said Claire Putzeys, a Fidelity spokesperson. “Fidelity has an unwavering commitment to delivering exceptional outcomes for plan sponsors and participants in our target date funds.”

Vanguard managed roughly $1.2 trillion of TDF assets at the end of 2021, about 36% of the total market, according to Morningstar. Fidelity managed $460 billion (14% of the total) and BlackRock $289 billion (8.8%). (BlackRock ranks fourth in total TDF assets, behind third-place T. Rowe Price, with $374 billion.)

BlackRock, unlike Fidelity and Vanguard, is not also a 401(k) plan administrator.

Low costs are a common theme among the TDFs most popular with both investors and the employers who choose to make them available to their employees.

This trend has occurred more broadly across the investment industry, as investors pivot to index funds over those that are actively managed. The former tend to have lower annual fees for investors.

The cheapest fifth of TDFs received $59 billion of investor money in 2021, up from $41 billion in 2020, according to Morningstar. Meanwhile, the three most-expensive quintiles saw investors withdraw a net $38 billion.

“Low fees … continue to drive target-date mutual fund flows,” the Morningstar report said. “Cheaper mutual fund target-date series have attracted more investor interest than those with higher price tags.”

The Fidelity Freedom Index, Vanguard Target Retirement and Schwab Target Index have the lowest fees among target-date mutual funds, according to Morningstar. Investors pay an annual 0.08% fee on their money. (A $10,000 investment costs about $8 a year.)

The BlackRock LifePath Index and State Street Target Retirement funds are similar, with a 0.09% annual expense.

TDFs may not make sense for all investors, though.

Some financial advisors think the “set it and forget it” funds are best suited for younger employees, who often have a less complex financial situation, or those with less investing experience; the funds help put savings on autopilot, by managing essential functions like de-risking and portfolio rebalancing.

That’s not to say TDFs aren’t well suited for investors closer to retirement; but it’s a good idea to reconsider how they do or don’t fit within the construct of their overall finances, which tend to get more complex over time. (For example, your TDF may have a larger share of stocks to bonds than makes sense for your overall portfolio.)