Non-Proprietary TDFs Gaining More Attention

Recordkeepers that offer their own target-date funds (TDFs)—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., according to a study conducted jointly by AllianceBernstein L.P (AB) and BrightScope, a Strategic Insight company.

Since 2009, defined contribution plans have cut back on using recordkeepers’ proprietary TDFs by 16 percentage points, from 59% to 43%, and expanded the use of non-proprietary TDFs such as those offered by outside asset managers by 16 percentage points. 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, the firms say.

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 (more than $1 billion 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 (less than $100 million in assets), however, that have limited flexibility, still use recordkeeper TDFs. 

Jennifer DeLong, head of defined contribution at AB in New York, tells PLANSPONSOR that over the past couple of years, AB has been noticing, in discussions with plan sponsors and advisers, a more thoughtful consideration going into TDF decisions. “We’ve seen fewer plan decisionmakers choosing funds offered by recordkeepers—they used to be offered discounts and it was easier to choose proprietary funds. We wanted to see if we could get data behind that shift, and we thought BrightScope would be a good source since it has such a robust data source of plans of all sizes.”           

As for reasons proprietary funds are losing market share on their own platforms, DeLong says there are clearly more TDF fund options available today than in past, The research found 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. “So perhaps plan sponsors and advisers are taking a closer look at the wider range of options to see what is the best fit for their plans,” DeLong says. “In addition, there is more focus on fiduciary decisionmaking and litigation going on in the defined contribution plan space. It is a fiduciary duty to make the best decisions for plans and participants.”

Another thing discussed as in the research report as a possible reason behind the shift to non-proprietary funds is the Department of Labor (DOL) tips about TDFs in 2013, DeLong notes. One suggestion is for plan sponsors to consider custom or non-proprietary TDFs. DeLong explains that proprietary could mean proprietary to the recordkeeper or a TDF using all underlying funds from the same asset manager. “Hopefully, DC plan fiduciaries are paying attention, but it is too soon to tell since the data from the study was from 2014,” she says. “But we will follow up with 2015 and 2016 data. BrightScope is still getting all 2015 data because there’s a lag in Form 5500 data available.”

The research found the use of recordkeeper proprietary TDFs is higher for smaller plans. More than 60% of smaller plans still use proprietary TDFs from their recordkeepers.

“We usually see trends start with larger plans and move to smaller plans,” DeLong says. “Larger plans have more resources and staff to be able to take a closer look. We expect the trend will make its way to smaller plans over time, especially as advisers to smaller plans are taking a look at this.”                                  

Successful TDF managers are no longer dependent on their own recordkeeping platforms: Instead, they have focused on placing their TDFs on other recordkeepers’ platforms, broadening distribution, the research found.

“Some have gained a lot of shares on other platforms; their assets have grown a lot. But, it’s still a question whether it has offset what they’ve lost on their own platforms. Still, it doesn’t mean their funds overall are losing assets,” DeLong notes.

According to the research, 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. 

“We thought this finding was interesting and didn’t necessarily expect it because we didn’t look at it before,” De Long says. “Recordkeepers have been able to retain proprietary share by introducing CIT TDFs. The research shows the shift from mutual fund TDFs to CIT TDFs has changed significantly among top providers.”

She notes that AB research shows, as of right now, there are about 63 CIT target-date series, more than expected. The move to CIT TDFs, DeLong believes, is from an overall focus on fees. “Clearly the way to provide solutions for lower fees is with CITs, and there are more available than there used to be,” she says.

“We’re interested to see the trends and do plan to watch it going forward,” DeLong concludes. “We suggest decisionmakers separate TDF decisions from administration decisions and look at all options. And plan fiduciaries should document their decisions. Documentation is most important in today’s DC world.”

The research report is here.