Move to Non-Recordkeeper TDFs Is Growing

In the second of SEI’s Institutional Group’s three-part study looking at the management of defined contribution (DC) retirement plans in the United States, SEI found that non-recordkeeper or off-platform target-date funds (TDFs) continue to grow in popularity among plan sponsors.

While 90% of survey respondents said they currently offer TDFs as an investment option in their plan, the use of recordkeeper TDFs and non-recordkeeper TDFs is essentially split evenly. Those plans with more than $1 billion in assets, referred to as “mega” plans in the survey, are leading the way, with 64% offering non-recordkeeper TDFs.

“The notion that nearly as many plan sponsors are using off-platform TDFs as are using recordkeeper TDFs supports a broader trend around the decoupling of asset management from recordkeeping,” says Joel Lieb, director of the Defined Contribution Advisory Team at SEI’s Institutional Group. “In the past few years, regulatory agencies, such as the Department of Labor, have issued guidance to plan sponsors to evaluate non-recordkeeper TDFs as a potentially better option and it looks like that shift is well underway. We would expect that trend to continue as more plan sponsors build DC plan line-ups that offer traditional institutional investment options.”

One potential trigger for future changes is an overall lack of satisfaction among plan sponsors around participant usage of TDFs, SEI contends. More than half (58%) of survey respondents said they would like to see more of their participants using the TDFs they offer. Nearly three-quarters (73%) said less than half of their participants use the TDFs they offer in their plan. Plans with DC assets between $300 million and $1 billion showed the lowest levels of TDF participation.

In an effort to improve the usage of TDFs, plan sponsors are beginning to assess both the number and quality of the funds they offer. More than three-quarters of those polled said they offer between six and 15 funds in their TDF series. Plan sponsors are also applying re-enrollment schemes to bring their participants into TDFs. Nearly half (42%) of those polled said their organization was likely to conduct a re-enrollment within the next year. Re-enrollment would likely help increase TDF usage by defaulting more participants into TDFs.

The poll was conducted by SEI’s Defined Contribution Research Panel in December 2015 and completed by 231 executives representing DC plans ranging in size from $25 million to more than $5 billion.