TDFs Lead Growth in Target Portfolios

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.