Rise in TDF Popularity Causes Core Menus to Shrink

The rising popularity of target-date funds in defined contribution plans has led to a reduction in the number of core menu investment options, according to a new NEPC survey. 

After surveying 240 DC plans, of which the average plan had $1.5 billion in assets, NEPC’s 2023 DC Plan Trends and Fee Survey revealed that 97% of plans offer TDFs and that, on average, 47% of plan assets are invested in TDFs. 

As a result, the core menu is shrinking. For example, in 2010, when an average of 28% of assets were invested in TDFs, that meant 72% of assets were invested in offerings in the core menu. However, by 2023, assets in TDFs had steadily increased to reach that 47% figure, meaning only 53% of assets are now invested in the core menu, NEPC found. 

While a recent PGIM report found that older participants are more likely to take advantage of the core menu options, NEPC’s data tell a different story. For participants older than 65, which include retired, terminated and active employees, NEPC found that more than half are 100% invested in TDFs and that 53% of all contributions are directed to the plan’s TDFs. 

The PGIM report focused on smaller-sized plans than the NEPC report, as it cited data from plans ranging between $1 million and $250 million in assets.  

Bill Ryan, a partner in NEPC and head of its DC team, says the industry has been telling the story that older participants are taking the most advantage of the core menu for a decade, but it may not necessarily be true anymore. As automatic enrollment has become more prevalent, Ryan says, more participants—across all ages—have invested more via target-date funds, which tend to be the default investment. 

According to NEPC, close to 30% of plans have fewer than 10 core investment options, and Emma O’Brien, a principal in NEPC, predicts this trend toward streamlining will continue.  

“If you look across the different buckets where we’re breaking out the number of core options that are offered, equities compressed at a much faster rate relative to the other options that are offered, and I think that’s driven by the fact that, historically, there have been multiple flavors of active equity options within lineups,” O’Brien says.  

David Blanchett, head of retirement research at PGIM DC solutions, argued in a recent paper that core menus should include more conservative asset classes for older participants. He wrote that the most notable gaps in asset class availability today include inflation-linked bonds, commodities and real estate and that long-term bonds and high-yield bonds deserve wider consideration as well

He advised that plan sponsors should consolidate existing riskier options to make room for more conservative asset classes that are currently missing. 

Retirement Income Trends 

NEPC also found that 86% of all plans surveyed offer a retirement income solution—most often in a TDF paired with some kind of systematic distribution feature.  

Among participants 65 or older, 68% are terminated or retired, which Ryan clarifies is the population eligible to take a retirement-income distribution from their retirement plan. Of that group, 26% are taking some form of systematic distribution, and another 24% are taking a required minimum distribution.  

Ryan argues that the data show retirement income solutions, which may simply have an option for systematic withdrawals and not an in-plan annuity, are working and are helping people afford their obligations and spending needs in retirement.  

“Target-date funds with systematic distribution allow us to provide a paycheck in retirement, which I call the Batman dilemma,” Ryan says. “[It’s] maybe not the hero that you want, but it’s the hero that you need right now.” 

Managed Account Fees 

The NEPC survey also found that while 43% of plans offer managed accounts, only 5% of participants use the accounts.  

Meanwhile, Ryan says fees associated with managed accounts came down by about 20% to 40% over the second half of 2023, and he anticipates those fees will continue to drop. He says one reason fees are decreasing is a slowing of new adoption of managed accounts. 

“There is … more competitive pressure on platform[s] to marginally add new plan sponsors, so that’s creating softness in pricing,” Ryan says. 

Additionally, Ryan says there are new entrants in the market, such as proprietary products provided by recordkeepers that do not share revenues with a sub-adviser, so the recordkeeper may have more leeway to lower associated fees. 

“Vanguard has their [managed account] priced at 15 basis points,” Ryan notes. “It’s exclusive to the Vanguard recordkeeping platform, but it’s catching attention on what prices should be, so it’s causing a little bit of a stalking horse in the industry.” 

Ryan says he is not surprised there are new fee offerings coming in at 20 bps or lower. 

“The fees are high, so the [bad] rap that they’re getting is maybe appropriate,” Ryan says. “We’re happy to see the softness [in fees] that we’ve observed, but we do think there’s a ways to go.” 

Because of the way managed accounts are set up with their “nudges and dynamic communication,” Ryan says he anticipates that participation will grow organically.  

According to the survey, the median annual managed account fee is $146 per account which equates to 39 basis points for the data compiled. Those numbers were calculated by dividing the average fee per account by the average asset per account for each client surveyed. 

“But if we get to a point of price parity, where managed accounts are in the single digits, we can actually see a lot of consultants, including NEPC, supporting managed accounts as a future plan default,” Ryan says. “If we can get to a price parity and tipping point, we could see a material increase in managed accounts.”