Target-date fund providers should offer more than one series of TDFs to meet the myriad needs of defined contribution plan providers, according to the August edition of The Cerulli Edge.
“Two DC plans in the same industry and with similar employee demographics may arrive at very different target-date choices based on contrasting priorities for the plan,” Jessica Sclafani, associate director at Cerulli, said in a statement. “As a result, some of the more successful target-date providers are concluding that it is necessary to offer more than one off-the-shelf target date product to meet DC plan sponsors’ varied needs.”
For example, T. Rowe Price offers its flagship target-date series, as well as a second series with a more conservative glidepath. Fidelity also offers more than one off-the-shelf target-date product.
However, few providers anticipate joining them. Cerulli found 54% aren’t planning on launching any additional off-the-shelf products. They were evenly split between focusing on custom solutions and believing their current target-date offerings represent their “best thinking.”
Cerulli found providers with more assets in TDFs were more likely to consider adding an additional series to their offerings.
“This is not surprising given that there are many target-date providers that are currently struggling to gain traction in what is undeniably a top-heavy industry and also one in which pure investment-only managers enter with a significant disadvantage,” according to the report.
The target-date fund market continues to grow. TDFs accounted for 18% of 401(k) assets at the end of 2014, up from 5% in 2006, according to the Investment Company Institute’s 2016 Retirement Factbook. They’re offered in 72% of 401(k)s, and 48% of participants have assets in a TDF.
Target-date fund managers themselves are confident about the future, particularly in DC plans. A Cerulli survey found 86% of managers expect assets to grow in target-date funds in the DC space. Respondents were more divided on asset growth outside DC plans. Fifty-six percent expect assets to grow and 44% expect no growth.
“Cerulli estimates that as of year-end 2015, target-date assets held in 401(k) plans surpassed $900 billion,” Sclafani said. “The importance of an asset manager’s strategy for participating in the target-date fund market has only grown and shows no sign of decreasing.”