Although an entire series of target date funds may be marketed to retirement plan sponsors, they may decide to choose only a few funds out of the series. So say data from a new analysis of 401(k) recordkeeper platforms released Tuesday by the Financial Research Corporation (FRC).
The FRC study was released at the same time that Morningstar completed its quarterly review of target-date fund family ratings, and some changes were made—including a downgrade for powerhouse target-date provider Charles Schwab.
Morningstar, in its quarterly review of target-date fund family ratings, downgraded Schwab to Below Average from Average because of the sudden departure of its previous manager “and the lack of clear, long-term succession plan.” While an interim manager from Schwab’s collective trust group has been named, Morningstar said, “there is currently a great deal of uncertainty about what this series will look like in the future.”
The FRC study, “Trends in Target-Date Portfolios on Recordkeeper Platforms,” is a joint project with BrightScope, a provider of retirement plan ratings, and the authors say the study reveals a trend that may mean trouble for fund managers. Because not all funds in a series are accepted by sponsors, they say, some fund managers may be confronted with unanticipated demand for their funds.
According to the data, fund selection differs by recordkeeping platform and by retirement plan, an indication that sponsors likely are choosing only those funds that suit the specific demographics of their participants. While such customization can be good for a plan, it can spell trouble for a larger target-date fund series.
The report is one of the first to look at adoption of target-date series funds on 401(k) platforms. In addition to the possible trend cited above, it examines the way recordkeepers and sponsors use target date products, and looks at product distribution trends.