November 12, 2012

TDFs Lead Growth in Target Portfolios

Market share to reach 80% by 2016

Growth in target-date funds is expected to increase 21% between the end of 2011 and 2016, a study conducted by BrightScope with Fuse Research Network, an asset management research and consulting firm, found. Market share in defined contribution plans should increase from 76% in 2011 to 80% in 2016.

BrightScope on Wednesday launched a series of research reports examining the defined contribution market. The first, “DC Product Usage Trends: Target Portfolio Assets,” covers target-date and target-risk portfolios.

It’s true that both target-date and target-risk funds suffered during the recession, but the report noted that losses then have been made up for by now; assets in target portfolios recovered their pre-crisis levels in 2010. Now, target-date and target-risk funds have a combined $470 billion in defined contribution assets, BrightScope found.

BrightScope noted that target-date portfolios take a larger share than target-risk portfolios, at 70% of defined contribution assets. Target-date portfolios also boast a much higher average balance than target-risk portfolios: $12 million compared with $2 million.

Target portfolios’ popularity were already on the rise during the early part of the century, but the Pension Protection Act in 2006, which encouraged their use as default investment options, spurred their growth, the report found. In 2007, the year after PPA was passed, target-date assets increased from 50% of the defined contribution market to 65% in 2009.

In spite of that encouragement, though, an October report from AllianceBernstein found that while more than half of retirement plan sponsors offer a target-date fund in their plans, just half of those use them as the default option.

However, BrightScope surmised a high concentration of target-date assets in large and mega plans was probably a result of plans of that size, where automatic enrollment is more prevalent, using TDFs as their default.

Mutual funds, which are the most common investment vehicle used in the defined contribution market, are expected to grow 20% between 2011 and 2016, BrightScope found. However, collective trusts are becoming increasingly more popular. They have an expected growth rate of 26% over the same time period, and today account for more than one-third of target-date assets, compared with 60% for mutual funds.

BrightScope attributed collective trusts’ growth to a need for lower costs, better customization and a growing interest in alternative investments, which, as the report stated, “the CIT structure is often better able to accommodate than mutual funds.”

Although mutual funds still account for a greater share of total defined contribution assets (68%), collective trusts maintain a higher average balance, the report found. Although just 5% of DC assets are in CITs, the structure is favored by large plans due as their ability to be customized makes them useful in meeting fiduciary responsibilities. Consequently, the average aggregate balance for collective trusts in the target-date market is over $82 million, far more than the $10 million in mutual funds. Among target-risk funds, the average balance in collective trusts is $6.5 million compared with $3 million in mutual funds.  

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