Many plan sponsors are shifting away from recordkeepers’ target-date funds to nonproprietary versions. But others are still using yesterday’s model. We think it’s time to take a look around.
The Backstory: PPA and a Boon for Recordkeepers
Target-date funds’ popularity started to take off when the Pension Protection Act of 2006 included them in its list of qualified default investment alternatives (QDIAs) to be granted “safe harbor,” a safeguard from fiduciary liability for investment outcomes.
This legislation was a boon for asset managers that were also recordkeepers, who benefited by offering sponsors a simple solution: prepackaged, proprietary target-date funds with pricing that is bundled with the plan’s administrative costs. Many sponsors went the recordkeeper route because options were limited at the time and it was the path of least resistance.
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The Shift Is On-Away from Proprietary
Fast-forward to 2016, a year that saw target-date assets swell to $880 billion, according to Morningstar, with a lot more variety to choose from. Many sponsors, especially among large plans, are searching for-and finding-funds that are a better fit for their plans.
Multiple surveys confirm the trend away from recordkeepers’ target-date solutions. A 2016 Callan Associates survey found that only about 25% of plan sponsors expected to use their recordkeepers’ target-date funds last year, down from nearly 70% in 2011.
SEI’s Defined Contribution Research Panel also noted the shift, pointing out that larger plans tend to be more likely to deviate from their recordkeepers’ target-date funds. According to the panel, nearly two-thirds of mega plans (over $1 billion in assets) went the nonproprietary direction. In contrast, only one-third of small plans (under $100 million), which typically have limited flexibility, used nonrecordkeeper target-date funds.
Our findings echo the shift to separating the recordkeeper decision from the target-date decision: in our 2011 plan sponsor survey, 61% of sponsors who used target-date funds said they offered the recordkeeper option; in 2016, only 41% did (Display).
Why Some Plans Aren’t Looking to Move
We also asked plan sponsors who still use recordkeeper target-date funds and have $50 million or more in assets why they hadn’t looked around. After all, there’s a wide variety of choices today that could provide lower fees, enhanced diversification and other benefits.
Slightly more than a third of these plan sponsors said their plan’s investment or administration committee wasn’t interested in other options. Nearly half of those responses came from plan sponsors who were human resources executives, but only 29% of treasury or finance executives gave similar answers.
Other reasons cited nearly as often? The plan’s financial advisor or consultant hadn’t brought these issues to the plan sponsor’s attention, or the sponsor wasn’t aware of the benefits of making the change. Plans looking to add a target-date solution in the next few years seem to have gotten the word: only 11% were considering a prepackaged proprietary mutual fund target-date offering.
Time for Some Comparison Shopping
Changing up a plan’s underlying investments can check additional boxes on plan sponsors’ wish lists: better diversification in asset classes and/or managers, flexibility to adjust glide path exposures as market conditions change, and more competitive fees.
One lower-cost option that’s piqued the interest of sponsors, especially in larger plans with the flexibility to make the shift, is the collective investment trust (CIT). CITs are attractive because they offer the ability not only to cut plan costs, but also to provide transparency to participants.
Whether plan sponsors (or advisors and consultants) decide to stick with their recordkeeper or look around, they are the prudent experts when it comes to knowing what’s best for participants, so it’s critical for them to get target-date selection right—independent of selecting their recordkeeper. But for plan sponsors and the consultants who haven’t considered nonproprietary solutions, we think it makes a lot of sense to take a look at the full breadth of options available today.
“Target date” in a fund’s name refers to the approximate year when a plan participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as a participant nears retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested—including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
Article by by Jennifer DeLong – Alliance Bernstein