Jan. 2015

How Do You Uncover the Best Target Date Fund?

Since the dawn of the 401k, empowering individuals to manage their own retirement investments, the quest for solid returns has been saddled by employees, HR professionals, financial advisors, corporations and ultimately, it falls onto society and government. The real issue is that the 401k has been a colossal failure for participants, as so many individuals find investment decisions a burden and overall 401k performance has been influenced by emotion, indecision and lack of skill – read horrific.

Companies, the investment management industry, consultants and government have teamed up to modify laws and products seeking to save participants, allowing for automatic enrollment (any savings is better than none) and structured funds of funds, categorized by the employees’ retirement dates, known as Target Date Funds (TDFs). TDFs handle asset allocation and fund selection processes for the participant.

The catalyst is the Pension Protection Act of 2006. PLANSPONSOR believes that TDFs are easy and simple, with limited interaction for participants due to the automated enrollment and escalation. Our current reality; individual account retirement ownership is decreasing, losing over 4% from 2001 to 2013. However, the asset value of accounts has grown in that time from a median balance of $35,456 to $59,000, which is still hardly enough for retirement.

The competition is fierce for Target Date Funds and for good reason. New money is invested into 401k every two weeks and Cerulli Associates projects that almost 40% of inflows will be acquired by TDFs just in 2013. TDFs are anticipated to reach more than 80% of new inflows by 2020. Total retirement assets from 2012 increased from $18 trillion to $21 trillion in one year. Everyone wants a large helping of this pie of TDF issuers, underlying mutual funds (TDFs are generally allocated to of a series of mutual funds comprised of various asset classes such as stocks, bonds and commodities) and asset classes and structures without major representation in TDFs to date such as ETFs.

According to the 2015 Defined Contribution (DC) Trends Survey by the Callan Investments Institute, about 1 in 10 plan sponsors replaced their target date fund/balanced fund manager in 2014, and the proportion of plans that offer their record keeper’s proprietary TDF declined precipitously, from 47.5% in 2013, to 28.7% in 2014. PLANSPONSOR expects this number will decrease even further in 2015 (to 23.6%).

Funds need to rethink their asset gathering strategies by focusing on their differentiating factors and ways to convince analysts that a meritocracy of funds should trump “business issues” and remaining within major fund complex fund families. What makes their firm different, and more importantly, better than others? Once that is calculated, the focus should be directed toward positioning and messaging. The right messaging is essential to highlighting the differentiators. Add predictive analytics, and fund complexes will have the optimal asset gathering strategy and execution.

The next big battle will be rollovers from the 401k to IRAs and other accounts. Stay tuned.


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