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Market Share of Proprietary TDFs Eroding

Though the big three target-date fund providers (Vanguard, Fidelity and T. Rowe Price) have over 70% market share, the percentage of plans using their record keeper’s proprietary TDF is slipping.

According to research from Brightscope on 10,000 401(k) plans, just 50% used proprietary TDFs in 2013, down from 57% in 2010. In a separate report, the percentage of plans offering custom TDFs almost doubled in 2014 from 11.5% to 22.3% at the expense of record keepers’ proprietary TDFs, according to recent research by Callan, with larger plan usage dropping from 47.5% to 28.7%.

Not only are plan sponsors and their advisors asking the obvious question of why the selection of a TDF should be based on what their record keeper offers, the DOL raised the same issue in their 2013 guidance on TDFs.

Regarding TDFs that only use proprietary funds, Alliance Bernstein’s Dick Davies asks, “What other asset category within a DC plan allows just one investment manager? There is a definite move away from bundling record keeping and TDFs.” Davies further asserts, “Target date funds will not bundle an industry that has been unbundling for the past 20 years.”

Some experts think that the choice of a TDF provider is becoming more important than the selection of a record keeper. Advisors that passively allow their record keepers to dictate which TDFs their clients can use will find themselves, at best, commoditized, and at worst, replaced.

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