Recordkeepers which offer proprietary target-date funds are finding their share of assets on their own platforms declining as plan sponsors increasingly select funds from other providers, new research shows. This trend comes partially as a result of the expanding array of benefit solutions, such as enhanced diversification, lower fees and multiple managers.
Conducted jointly by AB and BrightScope, the study shows that the share of recordkeepers’ proprietary fund share as a percentage of their TDF assets declined 16%, from 59% in 2009 to 43% in 2014. Conversely, the use of non-proprietary TDFs increased by 16%, from 25% to 41%, over the same period.
The report explains that after the Pension Protection Act was enacted in 2006, recordkeepers experienced a boon, benefiting from offering prepackaged, proprietary TDFs with prices bundled with the plans’ administrative costs. But things have changed. Large plans are now “leading the migration” in unbundling their recordkeeper choice from their target-date selection, the report says. In the largest plans (over $1 billion in assets), the study found that the penetration of proprietary TDFs is the lowest among plans at 32%, compared to 38% in 2009. Smaller plans (under $100 million in assets), however, have less flexibility, as more than 60% still use recordkeeper TDFs.
The growth of the TDF market has been fast and competition is becoming a major factor, the study further notes. From 2009 to 2014, the total number of target-date providers increased by 16%, with approximately 78 firms offering more than 139 different TDF series. In addition, the number of plans using TDFs also increased by 16% and assets have grown by 229%, with significant growth in larger plans with more than $500 billion in assets.
Jennifer DeLong, Head of Defined Contribution at AB, emphasized that, “Whether DC plan sponsors, consultants or advisors decide to stick with their recordkeeper’s TDF or decouple their target-date choice from their choice for plan administration, we think it’s critical to evaluate each on its own merit.” She adds that, “The recordkeeper’s proprietary fund may very well be a good choice, but plans need to make sure they look at the full breadth of options that are available today, and document their selection process.”
Turning to Collective Investment Trusts
Meanwhile, the research further shows that some providers are turning to collective investment trusts (CITs) or other passively managed TDFs to respond to fee pressures and to try to retain proprietary market share. From 2009 to 2014, the use of CITs in TDFs nearly doubled from 29% to 55%, while target-date mutual funds saw their usage fall from 68% to 42% over the same period.
The study suggests that because CITs generally cost less than mutual funds, making them more attractive to plan sponsors, this shift could indicate a move by recordkeepers to keep their business with a plan sponsor that might want to move to another manager’s lower-cost target-date series.
The report’s data set covers 6,393 plans with $2.2 trillion in assets and 25.8 million participants in 2014. All data was gathered from Form 5500 and the attached Schedule of Assets for 401(k) plans with more than 100 participants and $1 million in assets.