The relentless growth of target date funds (TDF’s) and now custom TDF’s in defined contribution (DC) plans such as 401(k)’s show no signs of stopping. Ever since the 2006 Pension Protection Act gave employers legal cover to us TDF’s as a qualified default investment alternative (QDIA) within a 401(k) plan, they have become the default investment of choice and are approaching $1 trillion of plan assets (currently $857 billion , up from $116 billion in 2006 according to Morningstar).
The move to TDF’s is great news for plan sponsors and participants; however, they pose a real challenge to record keepers as commission and margins come under intense downward pressure. (See related article: Custom Target Date Funds – Great For Sponsors and Participants, Not So Much For Recordkeepers?) For example, Charles Schwab has introduced a new suite of funds at 8 basis points.
So, with TDF’s putting in top performances at lower costs, how do managers differentiate themselves and hold fees? It is estimated that TDF’s will capture 90% of all new 401(k) contributions by 2020. Enter the custom TDF. Managers are tweaking their index offerings to include actively managed “flavors” of TDF’s with differing levels of aggressive glide path options.
Sound familiar? It may be just a case of history repeating itself as providers add more sizzle than substance to their TDF offerings without fundamentally offering much added value. It’s hard to blame the managers for trying to appeal to advisors and sponsors; however it seems to be creating more confusion. It is creating a bit of a benchmarking dilemma for advisors as they have to sift through the extra “window-dressing” offered as added value.
But veteran advisors from The Retirement Advisor University (TRAU) caution that marketing should not change the fundamental analysis and benchmarking proposition. They maintain that attention should remain where it matters most to the participant; that is in the understanding of how the glide path changes over time relative to the class of participants as well as performance and costs. The rest are details.
