• Recordkeepers’ proprietary target-date fund share has declined by 16% since 2009, as the use of non-proprietary solutions from other asset managers has increased by 16%
• Use of collective investment trusts (CITs) has gained in DC plans as providers look to reduce fees
• Large DC plans are leading the shift to non-proprietary target-date funds (TDFs)
A new in-depth study conducted jointly by AllianceBernstein L.P (“AB”) and BrightScope reveals a dramatically shifting target-date landscape where recordkeepers who offer their own target-date funds – known as “proprietary” funds – are losing share of assets on their own platforms as plan sponsors are increasingly choosing funds from other providers given the increased array of solutions that offer benefits such as enhanced diversification, lower fees, multiple managers, etc. The research also provides insight on a competitive target-date market where some providers have turned to collective investment trusts (CITs) or passive offerings to respond to fee pressures and to try to retain share.
Since 2009, defined contribution plans have cut back on using recordkeepers’ proprietary TDFs by 16%, from 59% to 43%, and expanded the use of non-proprietary TDFs such as those offered by outside asset managers by 16%. The trend depicts a very different landscape from that in 2006, after the Pension Protection Act was passed and led to a boon for recordkeepers who benefited from offering prepackaged, proprietary TDFs with prices bundled with the plans’ administrative costs. Today, large plans are seen to be leading the migration to choose TDFs other than their recordkeeper’s offering as they decouple their recordkeeper choice from their target-date selection. In the largest plans (over a billion dollars in assets) the penetration of proprietary TDFs is the lowest at 31.7%, compared to 38.4% in 2009. More than half of smaller plans (under $100 million in assets) however that have limited flexibility, still use recordkeeper TDFs.
“Our data suggests 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,” said Brooks Herman, Vice President, Data and Research, Strategic Insight.
Competition is also more crowded in the target-date market today. The number of target-date providers has risen 16% from five years ago, as more and more asset managers started offering new target-date solutions. About 78 firms offer more than 139 different target-date fund series* today.
The research shows the use of collective investment trusts (CITs) has gained in DC plans, with some recordkeepers likely introducing CITs or other passively-managed target-date funds to respond to fee pressures and maintain proprietary share. Since 2009, the use of CITs in TDFs has nearly doubled from 29% to 55%. The study indicates major recordkeepers including Vanguard and T. Rowe Price have both seen assets invested in target-date mutual funds shift meaningfully to target-date CIT series in a relatively short time.
“Whether DC plan sponsors, consultants or advisors decide to stick with their recordkeeper’s TDF or decouple their target-date choice from their choice for plan administration, we think it’s critical to evaluate each on its own merit. The recordkeeper’s proprietary fund may very well be a good choice, but plans need to make sure they look at the full breadth of options that are available today, and document their selection process,” said Jennifer DeLong, Head of Defined Contribution at AB.
The broad-based survey taps BrightScope data that spans more than 6,000 401(k) plans, representing more than $2 trillion in assets and 25 million participants as of 2014—the most recent year for which data is available. A copy of the report is available at this link.
Key findings include:
TDFs assets have grown 27% annually over the past few years: Between 2009 and 2014, the number of plans using target-date funds has grown by 16% and assets have grown by 229%, with significant growth in larger plans with more than $500 billion in assets. The total number of target-date providers has grown by about 16% — to 78 providers — from five years ago.
Large plans are ahead in the shift to nonproprietary target-date funds: Use of recordkeeper proprietary TDFs is higher for smaller plans, with larger plans ‘unbundling’ their TDF decision from their plan administration decision. In the very largest plans with over a billion dollars in assets, the penetration of proprietary target-date funds is the lowest at 31.7%, down from 38.4% in 2009 and 34.4% in 2013. On the other side of the coin, more than 60% of smaller plans (under $100 million in assets) still use proprietary target-date funds from their recordkeeper.
Non-proprietary target-date solutions are gaining steam: Recordkeepers’ ability to capture share in their own proprietary TDFs has been declining since 2009 while use of non-proprietary TDFs is increasing. As a percentage of recordkeepers’ target-date assets, proprietary fund share has tumbled from 59% to 43%. Most have lost proprietary target-date fund share since 2009, and only three increased their share (Nationwide, Empower and Hancock) [insert stats] On the other hand, the share of non-proprietary target-date funds on platforms has leapt from 25% to 41%.
More plans are choosing collective investment trusts: From 2009 to 2014, the use of target-date collective investment trusts (CITs) nearly doubled as a percentage of target-date assets, from 29% to 55%. Meanwhile, target-date mutual funds saw their usage fall from 68% to 42% over the same period.
Successful TDF managers are no longer dependent on their own recordkeeping platforms: Instead, they have focused on placing their target-date funds on other recordkeepers’ platforms, broadening distribution. Vanguard, T Rowe Price and Wells Fargo, for example, had a much lower percentage of target-date assets on their own recordkeeping platform in 2014 compared with 2009 but have grown their overall share of the market.
*Includes mutual funds, collective investment trusts and insurance company group annuity series.
AB is a leading global investment management firm that offers high-quality research and diversified investment services to institutional investors, individuals and private wealth clients in major world markets.
As of June 30, 2017, AB Holding owned approximately 35.2% of the issued and outstanding AB Units and AXA, a worldwide leader in financial protection, owned an approximate 64.6% economic interest in AB.
Additional information about AB may be found on our website, www.abglobal.com.
BrightScope is a Strategic Insight business, providing data and analytics through the SI Data division. BrightScope drives the growth of data-driven decision-making at leading financial services firms. BrightScope builds best-in-class software solutions facilitating more effective sales and retention strategies for top financial institutions. BrightScope works with eight of the top 10 asset managers by U.S. open-end assets, and eight of the top 10 defined contribution plan recordkeepers. BrightScope maintains a database with information on more than 60,000 defined contribution plans, largely gathered from Department of Labor Form 5500 audited filings.