Customization gaining popularity among TDFs

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Three companies dominate the target-date fund market — Vanguard, Fidelity and T. Rowe Price account for 71% of the industry’s TDF assets, according to Morningstar. However, off-the-shelf products aren’t right for everyone.

“One size fits some, and possibly many, but certainly not all,” says Russ Shipman, senior vice president and managing director of retirement strategy at Janus Capital Group. Many plan sponsors are embracing that mentality, which is leading to more customization, he says.

The number of plans that offer their record keeper’s proprietary TDF dropped significantly from 47.5% in 2013 to 28.7% in 2014, according to Callan Investment Institute’s 2015 defined contribution trends study. Plan sponsors expect that number to decrease to 23.6% this year.

Plans with custom TDFs, on the other hand, nearly doubled from 2013 to 2014, from 11.5% up to 22.3%, Callan found. “There’s certainly an increased interest and adoption rate of customized solutions,” Shipman says.

In particular, that shift is being seen in the large and mega markets, says Susan Viston, client portfolio manager for multi-asset strategies and solutions at Voya Investment Management. “Plan sponsors are increasingly looking for target date strategies that employ best-in-class practices from DB, such as open architecture, a mix of active and passive investments, greater use of alternatives and institutional vehicles,” she says. “However, as the target date space continues to mature, there are more off-the-shelf providers that offer many of these ‘DB’ features.”

Solid organic growth

Organic growth was solid last year — target-date mutual fund assets reached $706 billion at the end of 2014, a Morningstar survey found. Investors put $49 billion into funds last year, an organic growth rate of 8%.

“From a participant perspective, we have found, based on our bi-annual survey of participants, that simplicity of the selection process, automatic adjustment as investment time horizon gets closer to retirement, built-in diversification and time savings are the top reasons for choosing target date funds,” Viston says.

TDF participants also felt more prepared for retirement than non-TDF users. More than half, 56%, of TDF participants felt they would meet their retirement goals compared to 41% of non-TDF users, according to the Voya survey. “We found that target date investors not only were more confident … but that this confidence translated into positive behaviors with target date users having, on average, a 2% higher contribution rate relative to non-TDF users,” Viston says.

Much of the TDF usage and growth has been concentrated in U.S. corporate defined contribution plans, Viston says. Adoption rates among DC plans in the public sector “has been lower as many plans are still seen as supplemental and as public market participants tend to be more conservative and risk adverse relative to their corporate peers with significantly higher allocations to fixed income,” she says. “We expect to continue to see greater adoption of target date funds in the public market as DC plans become more important and as participants become more familiar with their features/benefits.”

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