Proprietary Target Date Funds Dwindling in 401k Plans. When 401k plans first became popular, many record keepers only offered proprietary investments. Driven by market demand, record keepers were forced to offer third party funds giving rise to revenue sharing. The same phenomena are happening with target date funds according to research by Brightscope, a division of Strategic Insight, sponsored by AllianceBernstein (AB).
Since 2009, the research shows that assets in proprietary TDFs have declined by 16% driven by larger 401k plans. The use of collective trusts (CITs) over mutual funds has also grown driven by costs.
Notes Brooks Herman, Vice President, Data and Research, Strategic Insight, “Our data suggest that we have now entered a new era of target-date funds – this means new players and a greater appetite for considering a variety of target-date offerings outside of a recordkeeper’s proprietary TDF, which is likely a result of the increasing importance of fees, transparency and investment performance in DC plans.”
The boom in TDFs started in 2006 when the Pension Protection Act provided ERISA plan sponsors with safe harbor to use these investments as the QDIA or default option. With the growth of auto enrollment and more assets flowing into QDIAs as well as declining record keeping fees, TDFs provide an essential new revenue source for these providers.
Many record keepers including Vanguard will offer reduced administrative fees if their TDF is used. Though not a violation of fiduciary duty by plan sponsors, it puts more burden on them to conduct a review of the investments independent of the record keeper fees and services.
In the past, CITs were only available to larger 401k plans which is changing as larger advisory groups are offering smaller clients custom CITs by bundling assets with lower costs than what might be available off the shelf.
With an estimated 60-70% of new contributions flowing into the default option, with TDFs the most popular, which is expected to grow, 401k providers and advisors alike are scrambling to gain control. Plan sponsors and their committees should focus more attention on default options in general and TDFs specifically than any other investment offered to plan participants.
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