Target-date funds have been the Next Big Thing in 401(k) plans for a few years now and, if the latest projection is accurate, will only get bigger.
In a report released Tuesday, Boston-based Cerulli Associates said that 401(k) flows into TDFs are expected to more than double by 2019 what they were in 2013 — nearly 40 percent — and, in fact, will represent 90 percent of all 401(k) contributions by then.
Cerulli noted in its report that total retirement market assets grew 17 percent from $18 trillion in 2012 to $21 trillion in 2013, exceeding $20 trillion for the first time.
With all that money coming in, it has to go somewhere — and, according to Cerulli, the creation by the Pension Protection Act of 2006 of the concept of a qualified default investment alternative was a major factor in the rising profile of TDFs in defined contribution plans.
Because TDFs are relatively simple, offering “a one-stop investment solution,” and because most participants don’t take a hands-on approach to their plan investments, TDFs offer “an ideal investment for DC plans,” Cerulli said.
Auto-enrollment and auto-escalation will further push assets into TDFs, it said.
“The market for target-date funds is highly competitive given the industry’s expectations for future flows, and we anticipate that competition will intensify,” Jessica Sclafani, senior analyst at Cerulli, said, adding:
“Asset managers that do not have a proprietary target-date product will be forced to re-evaluate their DC strategy, as the assets that are expected to amass in target-date strategies over the next several years cannot be ignored.”
Cerulli also said in its report that 403(b) plans will increasingly become “more 401(k)-like,” and that the 403(b) market will “appreciate at a slightly higher pace than its 401(k) counterpart over the next five years.”
Other points raised in the report include an increase in plan sponsor concerns over fiduciary liability, to the extent that some are hiring two separate advisors for their plans — one for investments and one solely for fiduciary liability — so that they can lessen their perceived increasing liability as a result of increased regulatory attention.
And then there’s concern over risk.
According to the report, “Cerulli believes that as corporate DB plan sponsors identify entry points for implementing de-risking strategies, opportunities for experienced fixed-income managers to secure new mandates will unfold.
“Asset managers that have not done so already should invest in their fixed-income capabilities and seek to bring de-risking experts or specialists in-house to support client conversations. The firms that can position themselves as knowledgeable and consultative in constructing a dynamic de-risking glide-path will benefit,” it said.