Using Recordkeeper Proprietary TDFs Not a Given

Retirement plan recordkeepers can no longer count on selling their target-date funds (TDFs) to the plans they serve. A new study finds that almost half of the advisers who sell defined contribution (DC) plans now go shopping for clients’ TDFs, netting them the best fund for the best price—and often from a competitor.

This and other findings appear in Market Strategies International’s Cogent Report, “Retirement Plan Adviser Trends.”

“This is the first year we’ve seen plan advisers championing proprietary and non-proprietary options equally, which underscores how competitive the target-date market has become,” says Sonia Sharigian, senior product manager at Market Strategies and the annual report’s co-author.

The likelihood an adviser will suggest an external TDF increases, too, in line with a plan’s assets under management (AUM). Nearly six in 10 (59%) DC specialists managing $50 million or more in defined contribution AUM urge plan sponsors to consider an external asset manager’s fund instead.

The trend to such funds may not be surprising. According to Linda York, vice president, Syndicated Research and Consulting at Cogent Reports, the percentage has been edging up every year. “In 2013, just 32% [of advisers] recommended external target-date fund providers. In 2014, that number was 41%. Now, in 2015, it’s up to 47%,” she notes.

As to why, she posits “a variety of factors.” These include greater scrutiny of plan fees and wider choice of target-date options. Also, “the fact that more plan providers are offering more open architecture in their fund offerings means more advisers have access to external managers,” she says.

Less competitive recordkeeper fund providers could potentially lose a growing amount of market share, as target-date funds now rank as advisers’ second favorite investment option, trailing only traditional, actively managed mutual funds, the paper says. Four in 10 DC advisers (41%) recommend a target-date or lifecycle fund as the plan’s default—twice as many as suggest any other type of qualified default investment alternative (QDIA).

“The move toward external target-date providers, along with [an] increasing popularity of index funds, shows that retirement plan advisers are acknowledging their clients’ concerns of managing plans more responsibly, including seeking the best overall value for the money,” says York. “Among the elite group of DC specialists[—i.e.,  those managing $50 million or more in defined contribution assets—]we find strong preference for both active and passive target-date fund providers, indicating that asset managers will not only need to compete on performance and price, but also find ways to further differentiate their target-date offerings in the marketplace.”

Generally speaking, investment managers can differentiate themselves by adhering to the tried and true: reliability, trustworthiness and consistent performance, showing the adviser they are easy to do business with, the report says.

Other findings include:

• Nearly three-quarters (73%) of established DC advisers also recommend index funds to their clients, up from 64% in 2014.
• The percentage of advisers selling defined contribution plans is growing. Two-thirds (65%) of advisers report managing defined contribution assets as part of their overall book of business this year, up from 60% in 2014. “Established DC advisers who manage $10 million or more in DC AUM represent 27% of all advisers, up from 23% a year ago,” York says.
• Defined contribution advisers work with an average of 4.7 investment managers in their DC plans, down from 5.3 in 2014; however, they concentrate their business with just 2.7 plan recordkeepers—a number that has held steady for several years.

The report is based on a survey, performed in August, of 486 active advisers to defined contribution plans.

Market Strategies International is a market research consultancy that studies consumer/retail, energy, financial services, health care, technology and telecommunications topics.

More information about “Retirement Plan Adviser Trends” can be found here.