Target-date products continue to dominate the QDIA landscape, but new research from Cerulli suggests that providers must innovate beyond current norms to deliver the guidance and custom retirement solutions that participants need.
In its “U.S. Defined Contribution Distribution 2019: Opportunities for Differentiation in a Competitive Landscape" report, Cerulli suggests that providers should look for ways to improve upon engagement strategies, customization abilities and retirement income options – all in the context of promoting broader financial wellness.
The firm notes that the 401(k) industry overall generally has persevered in a state of net outflows, but the target-date market has experienced continued organic growth and TDF managers stand to benefit from a steady flow of contributions to default strategies. As of year-end 2018, target-date assets represent the majority (58%) of 401(k) net flows.
Yet despite this apparent advantage, asset managers struggle to penetrate the target-date market. Cerulli observes that the five largest target-date managers collectively account for more than 77% of market share, and the largest target-date series are closed-architecture products.
Meanwhile, the target-date space has witnessed a dramatic shift from active to passive management, with active target-date mutual fund net flows dipping into negative territory in 2018. In addition, the study observes that in the wake of fiduciary lawsuits surrounding fees, any default investments become the subject of intense scrutiny.
“The environment is challenging to navigate as an asset manager,” says Anastasia Krymkowski, associate director at Cerulli Associates. “That said, given the sheer volume of target-date contributions, it still pays to represent a small slice of a big pie.”
Challenging the Status Quo
To succeed in the QDIA space and better serve participants, providers must challenge the status quo by differentiating their products while justifying any additional complexity or cost.
Roughly half of investors ages 40 to 69 state they have no source of investment advice or rely on an unofficial source, such as the media or a family member, according to Cerulli. “The wealth management industry does not address every individual in need of guidance, which creates the so-called advice gap. This is particularly acute for less wealthy investors,” says Krymkowski. The study notes that in this situation, participants are likely to turn to their employers and third parties – such as recordkeepers, plan advisors/consultants and managed account providers – for guidance.
When asked which features are likely to emerge in target-date products across the industry, more than 90% of target-date managers view the incorporation of a transition to managed accounts as “highly likely” or “somewhat likely.” Cerulli observes that this design allows younger participants to benefit from lower-cost options while more closely monitoring investments for individuals nearing retirement. “While a personalized approach can benefit older investors or those with significant assets, plan sponsors remain cautious about defaulting participants to managed accounts in today’s fee-sensitive environment,” the report emphasizes.
Managed Options
Consequently, target-date managers are more likely to view managed accounts as a complement to their products, rather than as a threat, the study notes. Cerulli anticipates that unless managed account providers can lower their fees or demonstrate improvements in participant engagement, their growth as a QDIA vehicle will be limited.
To combat the assumption that managed accounts are too expensive for most participants, Cerulli notes that Vanguard in September 2019 launched a robo-advice platform for 15 basis points. In addition, Empower continues to expand its Dynamic Retirement Manager, which transitions participants from TDFs to managed accounts as they reach certain milestones.
Target-date managers also anticipate developments to include managed payout options and allow for greater customization at the participant level. In keeping with this view, a growing percentage of DCIO managers indicate they offer in-plan retirement income products.
As such, the study emphasizes that complex or less well-known products require additional communication to help participants understand the important features, limitations and fees associated with their retirement investments. “Participant-facing providers should also make an effort to educate investors about their options and strategies for drawing down from Social Security,” advises Krymkowski. “Taking a holistic view will better prepare them to evaluate potential sources of income and ultimately transition to retirement.”
