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Portfolio > Asset Managers

Cerulli: Custom Target-Date Funds in 401(k)s Expected to Rocket 370% by 2016

By Warren S. Hersch

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A new research study projects that custom target-date strategies will account for 22% of 401(k) target-date assets by 2016.

Cerulli Associates, Boston, released this finding in “The Cerulli Report: State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective.”

The Cerulli report pegs the value of custom target-date fund assets in defined contribution plans at $218 billion in 2016, up 370% from the $46.4 billion posted in 2011.

The forecast contrasts markedly with declining growth rates recorded since the 2007-2008 period, when asset values dipped 9.2%. During the 2008-2009, 2009-2010 and 2010-2011 periods, target date mutual fund assets in DC plans grew by 58.8%, 29.6% and 10.2%, respectively, the report notes.

The 2012-2016 projection is, however, in line with the triple-digit, aggregate growth rate recorded between 2002 and 2007. During this period, target date mutual fund assets in DC plans grew by an aggregate 321%.

Cerulli’s research also observes that custom target-date funds “open the door for alternatives in DC plans” as alternative asset classes have typically not been included in DC plan portfolios.

“We believe that plans will add custom target-dates at a rate of 2% per year for the next two years,” says Kevin Chisholm, a Cerulli senior analyst and lead author of the study. “The use of custom target-date funds provides access for DCIO asset managers to the growing pool of DC assets.

“In addition, these products also allow new asset managers to participate in the market, outside of the few that have dominated the space since the Pension Protection Act of 2006 blessed these funds as Qualified Default Investment Alternatives,” he adds.

The Cerulli report notes that plans with more than $1 billion in assets are more likely to use custom target-date strategies than plans with less than $1 billion. Cerulli estimates that target date assets in the mega market segment now total $139.5 billion.

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