Despite being the QDIA of choice among DC plans by an overwhelming margin, the seemingly unstoppable growth of TDFs finally slowed in the last quarter of 2014.
According to research from Morningstar, new flows into TDFs, at $6.5 billion (representing a 1% increase during the quarter) was half the historical average of $13 billion. The reasons? There are fewer plans that do not use a TDF as their QDIA; and more plans, especially larger ones, are using CITs and custom funds instead.
Despite the slower growth, retail TDFs topped $702 billion, a $15 billion overall increase, according to Ibbotson Associates, a Morningstar unit. The increase was mostly due to market gains: The average TDF returned 1.7 % in Q4 and 5.3% for 2014. Compare that with the S&P 500, which returned 4.9% last quarter and 13.7% overall, led by a very few big winners like Apple.
The big three TDF providers, Vanguard ($193 billion AUM), Fidelity ($187 billion) and T. Rowe Price ($122 billion) still enjoy a 72% market share. Leading gainers last quarter were American Funds ($3.2 billion); T. Rowe ($1.7 billion) and Vanguard ($1.6 billion).
The use of custom TDFs by larger plans doubled last year, and CITs also gained momentum. But the economics and mindset among small and mid-size plans is very different. Those plans are more likely to use 3(38) or 3(21) advisors employing custom third parties’ glide paths using the fund lineup selected or suggested by the plan’s advisor.
