After a previous setback, BlackRock is launching new target-date ETFs, aiming at the vast market of Americans without pension plans, a move seen as promising for the self-employed.
BlackRock is reviving its target-date fund ETF series with a fresh approach, targeting the trillion-dollar market of Americans lacking pension plans, nine years after its initial failure.
“As Americans face increasing challenges in planning for retirement, we initially launched a target-date fund in October 30. Now, we’re making these products even more accessible through an ETF format, aiming to reach the 57 million Americans without employer-provided retirement plans,” Larry Fink, CEO of BlackRock, wrote on LinkedIn.
Strategic pivot
BlackRock’s introduction of the new iShares LifePath target-date ETF series marks a significant shift. The firm had previously closed its entire range of target-date fund ETFs in October 2014, originally launched in 2008.
Historically, ETFs struggled to integrate into 401(k) plans – U.S. pensions funded by employer and employee contributions. Notably, Deutsche Asset and Wealth Management also discontinued its target-date “X-trackers” in 2015.
Now, BlackRock is targeting individual retirement savers, diverging from the 401(k) market focus. Deborah Fuhr, founder of ETFGI and former head of BlackRock’s ETF research team, believes this strategy holds more promise than the initial market entry.
IRA market focus
American individual retirement accounts (IRAs) boasted assets of thirteen trillion dollars by Q2 2023, surpassing the seven trillion and two hundred billion dollars in 401(k) plans, as per Investment Company Institute and Department of Labor data.
However, IRAs see only eight percent of assets in hybrid funds like target-date funds, compared to eighteen percent in 401(k) plans.
Fuhr notes, “Investors and regulators are increasingly interested in target-date funds. A ‘set it and forget it’ strategy often outperforms frequent risk profile changes.”
According to Fuhr, who joined BlackRock around the closure of the previous ETF series in 2008, these products have global potential, “including in UCITS form.”
Example for Europe?
The relevance of this strategy for the European market, with its collective national pension schemes, is debated. Yet, Simon Wiersma, chief investment strategist at ING, sees potential for self-employed individuals and those building private pensions.
“In most cases, Dutch pension funds don’t disburse a lump sum, making the end date less critical than in the US. However, for the self-employed or those seeking a lump-sum pension, this could be appealing,” Wiersma explains.
While BlackRock’s new ETFs are unique in the US., asset managers are keenly observing their performance. “For now, I don’t expect others to follow suit,” remarks Megan Pacholok, senior researcher at Morningstar.
Performance questions
The appeal of target-date funds to individual pension investors remains uncertain. Although providers like Fidelity, Vanguard, T. Rowe Price, and Charles Schwab have seen success, these funds often trail behind balanced funds with a traditional 60/40 portfolio mix.
Morningstar research indicates that investors in Vanguard and Fidelity’s target-date funds, commanding over half of the market’s assets, would have fared better with balanced fund investments.
These funds have lower exposure to underperforming foreign stocks compared to U.S. equities, explains John Rekenthaler, head of research at Morningstar.
The reason for the heavier non-U.S. stock investment in Vanguard and Fidelity’s target-date funds, as opposed to their balanced funds, is due to 401(k) plans’ institutional diversification requirements, notes Rekenthaler.