Advisers Hardly Ever Recommend Active TDFs to Retirement Plans, Research Shows

A survey conducted by Cerulli Associates showed that only 7% of defined contribution plan advisers would recommend an actively managed target-date fund to a retirement plan client, with the consultancy advising asset managers to stress the success of active strategies when touting both blended and actively managed strategies.

The survey also found that that student loan matching and Roth matching contributions were the two provisions from the SECURE 2.0 Act of 2022 that advisers say they are most likely to recommend to a plan.

TDF Management Style

Researchers at Cerulli asked respondents, “When recommending an off-the-shelf target-date series, which management style is your firm most likely to recommend to a DC plan client?”

To this question, 47% answered “passively managed,” another 47% answered “blended,” and 7% answered “active.” Actively managed funds generally carry higher fees.

Cerulli noted that, “as blended TDFs gain traction and plan sponsors work to fulfill their fiduciary duties, Cerulli recommends asset managers offering blended series highlight their conviction and success metrics in the actively managed strategies offered within these series.”

Separate research from T. Rowe Price issued in 2023 noted that while only 9% of advisers reported using blended TDFs, a much larger 93% were interested in them.

SECURE 2.0 Recommendations

Respondents were asked which two provisions of SECURE 2.0 they were most likely to recommend to a client and which two were in most need of regulatory clarification.

The Cerulli survey found that 54% of advisers were most likely to recommend a plan add a student loan matching feature, and 38% were most likely to recommend a plan permit employer contributions to be made on a Roth basis.

Both policy changes were made by SECURE 2.0. The student loan match permits plans to make retirement contributions that match student loan repayments made by their participants, and the Roth match provision permits a plan to allow participants to receive employer contributions on a post-tax basis.

The two provisions were more popular among the sampled advisers than the saver’s match (25%) and offering a pension-linked emergency savings account (17%). Separate research from the Employee Benefit Research Institute showed these latter two provisions will likely be among the most important provisions of SECURE 2.0.

Student loan and Roth matching were also the two contributions advisers felt were most in need of regulatory clarification: 58% of advisers said plans need government clarification on Roth contributions, and 54% said the same of student loan matching.

In December 2023, the IRS issued a notice which included guidance on Roth contributions. It said participants may only receive employer contributions on a Roth basis if they are fully vested in matching contributions and the contribution is taxable in the year it is deposited in the participant’s account.

There has not yet been regulatory guidance on student loan matching from the IRS or Department of Labor, though the statutory provision became effective on January 1.

Rollovers

The survey also sampled advisers’ opinions about rollovers. Specifically, Cerulli asked advisers why their retirement plan clients opted to retain the assets of former employees as opposed to rolling them over to individual retirement accounts or to the plan of participants’ new employers.

Cerulli found that plans that retained employee assets were motivated by wanting to enhance their retirement offering (35%); their negotiating power with managers (22%); their negotiating power with recordkeepers (22%); their negotiating power with consultants (13%); and by “other”(9%).

Among those that chose to not retain the assets of former employees, Cerulli found those plans were motivated by: an unwillingness to maintain ERISA liability for former employees (57%); increased recordkeeping cost (14%); concern about offering in-plan features for retirees (7%); or “other” (21%).

The recently proposed retirement security rule from the Department of Labor may curb some retirement specialist advisers from recommending a rollover from a DC plan of less than $50,000, the consultancy reported. The proposal, which makes amendments to the prohibited transaction exemption requirements, laid out in PTE 2020-02, would bring one-time rollover advice under the Employee Retirement Income Security Act, increasing regulatory stringency.

“If enacted, Cerulli would not expect this regulation to have a meaningful impact on higher rollover balances if these balances (and clients’ household wealth) make it worthwhile for advisors to take on the added regulatory scrutiny,” Shawn O’Brien, director, retirement, wrote in a statement accompanying the research.