Has Target-Date Fund Opportunity Peaked?

A new Cerulli report says opportunity still exists, but success hinges on shelf space, product design, regulation, and performance. “We view the industry as being at a crossroads. More than 70% of asset managers feel that they have just begun to tap this opportunity, while a small but growing percentage think it has reached its peak. The top three fund managers currently control nearly 80% of target date fund assets,” said Cindy Zarker, lead analyst of the “Cerulli Special Report: Target-Date Funds: Still Viable?.”

According to a Cerulli release, the report explains that asset managers face a number of challenges. Some challenges, such as performance concerns, might soon begin to abate, reflecting a short-term reaction to the market and economic crisis, while others may plague asset managers indefinitely, such as fee pressure, limited access to shelf space, and the challenge of balancing greater customization with scalability.

“We feel that asset managers will be well-served to carefully assess the true opportunity against potential risks. Firms should ask themselves if they can gain critical mass without access to a recordkeeping platform. If they examine these tough questions, some may find that this is not the market for them, and fund consolidation becomes the logical option,” Zarker said.

Cerulli notes that nearly 70% of target-date fund portfolios have less than $100 million AUM, and most asset managers consider $100 million to $150 million to be the minimum level of assets for a mutual fund to be profitable. Zarker said target-date fund consolidation is needed to keep small funds from being a drag on organizations, consuming resources from the legal department to marketing.

Despite the challenges, asset managers believe that open architecture will ultimately take in this market leading to subadvisory opportunities, which, along with product innovation, will allow for meaningful asset gathering, according to the release.