TDF Market Complexity Brings Opportunity

The latest research from Cerulli Associates highlights the increasing complexity and opportunity within the defined contribution (DC) plan investment menu.

According to the August 2016 issue of The Cerulli Edge – U.S. Edition, the U.S. TDF market has evolved significantly in recent years and now presents an impressively wide range of approaches and strategies, including many that are particularly well-suited for the DC context. Just looking at 401(k) plans alone, TDF assets have topped $900 billion and show little sign of slowing, Cerulli finds.

Jessica Sclafani, associate director at Cerulli, suggests the importance of an asset manager’s strategy for participating in the TDF market has therefore “only grown and shows no sign of decreasing.” Employer-sponsored retirement plans, too, have a wider set of products than ever to choose from when it comes to the qualified default investment alternative (QDIA) role, far and away the most common means of offering TDFs.

Along with the added complexity and maturity of the TDF market comes an increasingly difficult set of choices for DC plan sponsors and participants, the Cerulli research argues. “Two DC plans in the same industry and with similar employee demographics may arrive at very different target-date choices based on contrasting priorities for the plan,” Sclafani explains. “As a result, some of the more successful target-date providers are concluding that it is necessary to offer more than one off-the-shelf target-date product to meet DC plan sponsors’ varied needs.”

Examples of this could be as simple as a provider offering a low-risk, medium-risk and higher-risk version of an otherwise quite similar TDF—or a provider creating two versions of a similar TDF, one of which includes a small alternatives exposures. Given the vigorous development/competition in the marketplace and the increasing incidence of customization, the possibilities are pretty much endless, Cerulli speculates.  

NEXT: Embracing TDF diversification 

Cerulli points to the lasting importance of a 2013 “tips sheet” put out by the Department of Labor (DOL) when it comes to making compliant decisions regarding using one or more TDFs within tax-qualified plans. The research in particular predicts the labels of “open” and “closed” architecture will be critical to decisionmaking in the years ahead.

“In 2013, the DOL suggested plan fiduciaries revisit their target-date fund selection and consider non-proprietary target-date funds,” Cerulli researchers conclude. “While the DOL does not use the term ‘open architecture,’ its description of the potential benefits of a non-proprietary target-date fund align with the industry's understanding of an open-architecture approach. Based on a Cerulli Associates 2016 proprietary survey of target-date providers, the open- versus closed-architecture paradigm represents a potential area of opportunity as target-date providers consider expanding their product suite.”

That said, it is important for plan sponsors to look beyond these labels, such as "open" versus "closed," Sclafani concludes: "Open-architecture target-date funds do not always diversify plan participants' exposure to a single manager to the degree that the open-architecture label suggests. Open-architecture target-date products seem to resonate with the consultant community, who are quick to point out the potential risks of concentrated exposure to a single asset manager.”

Information on obtaining Cerulli research is here.