Morningstar Data Shows Managed Accounts Outperforming $5 Trillion Target Date Fund Market

New data from Morningstar suggests a performance gap in the retirement savings market, revealing that managed accounts are currently outperforming the more common target date funds (TDFs). This finding comes as target date funds have become the dominant choice for retirement plans, currently holding more than $5 trillion in assets.

The Dominance of Target Date Funds

Target date funds serve as the primary "qualified default investment alternative" (QDIA) for the vast majority of defined contribution savings plans in the United States. Their popularity stems from a simplified approach that automatically shifts asset allocations as a worker nears retirement age. However, despite their $5 trillion footprint, they are now facing scrutiny regarding their performance relative to more personalized options.

Managed Accounts Gain Ground

Managed accounts represent a much smaller segment of the market, with total assets currently sitting below the $1 trillion mark. Unlike the standardized model used by TDFs, managed accounts provide tailored investment strategies based on an individual's specific financial profile. According to Morningstar, this customized approach is yielding superior returns, which may challenge the traditional preference for TDFs among plan fiduciaries.

What to watch next: Financial advisors and plan sponsors may begin to re-evaluate their default investment offerings if the performance gap between managed accounts and target date funds continues to widen.