In a survey of target-date managers earlier this year, Cerulli Associates asked respondents what attributes were likely to be included in the next generation of target-date products.

Thirty-eight percent of asset managers predicted that use of strategic beta strategies would be the most likely feature, Cerulli reported.

Significantly fewer managers thought the following attributes were most likely to be included in future target-date products:

  • Managed payout options, 27%
  • Customization at the participant level, 23%
  • Incorporation of an annuity allocation, 15%
  • Incorporation of ESG principles into overall investment process, 12%

Strategic beta strategies, Cerulli noted, seek to deliver enhanced risk-adjusted returns relative to conventional market-cap-weighted passive allocations. These strategies are active in their objective of outperforming broad market indexes, but also passive in their systematic and rules-based implementation.

Target-date funds are long-term investment products, meant to be held through multiple market cycles. Benefits could accrue to asset managers that include strategic beta into their target-date series.

“In a target-date market dominated by low-cost, passive providers, strategic beta strategies are a way for active managers to compete with pure passive on cost while retaining some of the value-add tenets associated with active management,” Cerulli analyst Dan Cook said in a statement.

“For the larger target-date providers, strategic beta series can also serve as another option in their target-date product suite, giving plan sponsors the choice between passive, active and strategic beta.”

Recent trends in the defined-contribution markets argue for incorporating strategic beta into target-date products, Cerulli said.

For one, recent scrutiny of investment management fees has benefited low-cost providers. In addition, robust market performance between 2012 and 2014 provided investors who invested in an S&P 500 index fund with double-digit year-over-year returns — at the expense of active management’s credibility.

Cerulli research identified strategic beta funds’ average cost at 25 to 50 basis points, roughly between active and passive. It said that although these strategies may not be competitive on cost with products from big target-date providers, the investment philosophy could be a point of differentiation.

On performance, it said that purely passive investments usually falter during market downturns. Asset managers that offer strategic beta target-date series could successfully pitch their products as cost-effective strategies for reducing volatility and sequencing risk for retirement investors in declining markets.

Cerulli noted that although advancements such as strategic beta and hybrid offerings in target-date product development could potentially improve participant outcomes, they will likely further complicate the due diligence process at the plan level.

For this reason, it said, asset managers introducing new target-date products into the defined contribution market must clearly explain their benefits and provide plan fiduciaries with all relevant details necessary to support thorough due diligence.

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