How to Improve TDFs and Regain Market Share: Hearts & Wallets

How can investment manufacturers reach investors who primarily access TDFs through retirement plans?

One problem with target-date funds: Many investors don't have a target retirement date. One problem with target-date funds: Many investors don't have a target retirement date.

Investment product manufacturers could regain some of the market share they lost to other distribution channels by offering product innovations that appeal to more sophisticated investors, according to a report by Hearts & Wallets.

For example, the report noted that in the last 15 years, consumers have accessed target-date funds through their retirement plans or broker-dealers instead of going straight to the provider. Manufacturers could offer improved products by de-emphasizing the date in target-date funds, Hearts & Wallets said.

The firm found a “sizable share of the population” doesn’t have a retirement date in mind either because they don’t feel comfortable with the variables that could affect their retirement savings like the increasing health care costs, inflation and longevity, or simply because they like working.

“Many investors, aside from pensioners, have no idea at what age they’ll stop working altogether, if ever,” Chris Brown, Hearts & Wallets principal, said in a statement. “They are very clear about wanting control of their work/life balance as they grow older.”

The problem for product providers is that target-date funds are “not nearly as attractive outside of a qualified plan as they are inside one,” Brown said. “In the future, compelling product innovation will feature different approaches to asset allocation, as well as addressing the ways in which people actually take income once they have stopped full-time work. Determining how to do this is the area of product development that is most exciting and potentially highly differentiating.”

One way providers could enhance TDFs to make them more appealing to more sophisticated consumers, according to Hearts & Wallets, is to base on the investor’s needs instead of age. “Many investors prefer to customize risk exposure instead of having a product that automatically reduces market exposure,” according to the report.

Simplifying the transition from accumulation to distribution is another differentiator, Hearts & Wallets found.

“Consumers will pay more for added value, such as making the transition from accumulation to income easier,” Laura Varas, Hearts & Wallets LLC principal, said in a statement. “Our research shows that by adding value to investment products manufacturers can improve sales and charge a premium for products that meet a need. That is critical given today’s intense focus on fund expenses.”

The report concluded that providers must also be able to offer multiple products, as respondents aren’t considering single income solution products. “Even if the right product is created,” according to the report, “it’s likely to only attract a portion of one's portfolio. Few […] are interested in putting all of their eggs in one basket.”

Hearts & Wallets surveyed people ages 40 to 64 in March, excluding respondents who were within five years of retirement. Respondents had at least $250,000 in investable assets and were employed full-time.

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