Custom Target-Date Strategies Will Hold 22% of 401k Target-Date Assets by 2016
BOSTON, MA, August 10, 2012 -- Cerulli's latest research study on the large and mega defined contribution (DC) plan marketplace includes in-depth analysis of the state of custom target-date funds within these plans, and includes projections for these assets to reach $218 billion by 2016, a 22% increase from the 2011 asset level of $46.4 billion.
"We believe that plan sponsors will add custom target-dates at a rate of 2% per year for the next two years. The use of custom target-date funds provides access for DCIO asset managers to the growing pool of DC assets. In addition, these products also allow new asset managers to participate in this market, outside of the few that have dominated the space since the Pension Protection Act of 2006 blessed these funds as Qualified Default Investment Alternatives (QDIAs)," comments Kevin Chisholm, senior analyst and lead author of this new Cerulli study entitled: The State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective.
Cerulli's research also notes that custom target-date funds open the door for alternatives in DC plans as alternative asset classes have long been missing from these plans' investment lineups.
"Additional asset classes are often only added to DC plans long after the rest of the industry begins to consider asset classes as traditional. For example, inflation-protected bond funds are only now being added to plans investment lineups. We expect that plan lineups will include a mix of investment vehicles with strategy trumping vehicle in the decision-making process," continues Chisholm.
Custom target-date funds may choose alternative structures (such as collective trust funds) over mutual funds, but mutual funds are expected to remain the product of choice for the majority of choices in plan investment lineups. The fact is that investment vehicle is a secondary consideration, and if savings from a collective trust is not significant, then plan sponsors are likely to continue to use mutual funds, especially in the large market ($250 million to $1 billion in plan assets) where mutual fund use as a percentage of assets is higher than in the mega market ($1 billion +).
A move to custom target-date funds, which create a glidepath specifically for a company's employee population and use best-in-class investment managers for each respective sleeve of the target-date strategy, would open the door for all asset managers to this growing stream of consistent flows.
Most survey results that have been published suggest that the overall percentage of plan sponsors that have already implemented a custom target-date strategy to be about 10%. However, there is bifurcation in the market, in which plans with more than $1 billion in assets are more likely to use custom target-date strategies than plans with less than $1 billion. Cerulli estimates that there is $139.5 billion in target-date assets in the mega market segment.
About Cerulli Associates
Headquartered in Boston with offices in London and Singapore, Cerulli Associates provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.
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