By Hal M. Bundrick NEW YORK ( MainStreet)--Set a goal year for retirement and choose your fund: target-date mutual funds are gaining favor, and investor dollars. TDFs grew to over $500 billion in assets in the first quarter of 2013, and while growth has slowed, fees continue to fall. The asset-weighted average expense ratio dropped to 0.91% in 2012, down from 0.99% in 2011, according to Morningstar. The funds have gained popularity in recent years, especially in 401(k) plans, as the allocation of the investments inside the fund adjust to a retirement goal date. Lingering questions regarding performance are being answered, as the funds have performed within broad market trends since 2008.
"Rising markets in 2012 and early 2013 helped target-date series turn in strong absolute returns," writes Josh Charlson, a senior mutual fund analyst for Morningstar in an analysis. "All but Morningstar's Target Date 2000-2010 category posted double-digit returns for 2012, and all but one peer group -- Target Date 2051+ -- has recouped losses from 2008's market crash. Target-date funds also have reflected healthy gains in the financial markets, especially due to rising equity markets." While most (68%) TDFs are actively managed, index-based investing is gaining momentum in the fund class. Flows into passively managed TDFs surpassed their actively-managed counterparts for the first time in 2012.
"We found that target-date funds with significantly different asset allocations deliver similar retirement savings outcomes up to age 85," says Josh Charlson, Morningstar's fund-of-funds strategist and the study's lead author. "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." Allocations to non-U.S. equities in the funds have increased significantly. Since 2005, international stocks have risen from 24% of the average 2040 fund's equity allocation to 36%, as of Dec. 31, 2012. Emerging-markets bond funds were held in nine target-date series in 2008, up to 18 in 2012.