TDFs Expected to Capture 90% of 401(k) Contributions

A new analysis from Cerulli Associates finds the market for target-date funds (TDFs) is already highly competitive given the industry’s expectations for future flows, and current trends suggest the competition will only intensify in the years ahead.

“Target-date funds captured nearly 40% of flows in 2013, and we expect this number to more than double before the end of the decade,” explains Jessica Sclafani, senior analyst at Cerulli. These findings are from Cerulli’s latest report, “Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans,” which examines the size and segmentation of public and private U.S. retirement markets, including defined benefit (DB), defined contribution (DC), and individual retirement accounts (IRAs).

As Cerulli notes, the Pension Protection Act (PPA) of 2006, which created the concept of a qualified default investment alternative (QDIA), continues to play a key role in increasing the use of TDFs in DC plans. The funds benefit from their perceived simplicity as a one-stop investment solution, Cerulli says. Coupled with a well-documented lack of engagement from retirement plan participants, many sponsors view TDFs as an ideal investment for DC plans, the research finds. The increased use of automatic features, such as auto-enrollment and auto-escalation, will also drive greater shares of assets into target-date strategies.

“Asset managers that do not have a proprietary target-date product will be forced to reevaluate their DC strategy, as the assets that are expected to amass in target-date strategies over the next several years cannot be ignored,” Sclafani explains.

According to Cerulli, total retirement market assets grew 17%, from $18 trillion in 2012, to $21 trillion in 2013, exceeding $20 trillion for the first time. Benefiting from strong equity market performance, the 2013 private DC industry surpassed the 2012 high of $3.9 trillion by adding an additional $825 billion in assets. Growth expectations for the DC market remain strong for 2015 and beyond, Cerulli notes.

The report also suggests Baby Boomer retirements will drive investment and plan service providers to develop additional strategies to support people as they exit the workforce and consider rolling assets out of a DC plan. Within the DC channel, plan sponsors are looking for innovative ways to engage the participant population, such as restructuring the company match or partnering with advisers willing to host meetings and seminars.

Notably, Cerulli projects the 403(b) market to appreciate at a slightly higher pace than its 401(k) counterpart over the next five years. Cerulli says this opportunity is largely the result of the changing way 403(b) plans are administered, suggesting the plans are becoming more “401(k)-like.” Opportunities in 457 will accompany this expected growth, the report finds.

As the DC landscape continues to increase in complexity and attract greater attention from regulators, it is becoming less feasible, particularly for smaller plans, to manage the DC plan without guidance from an adviser or consultant, Cerulli concludes.

More information on obtaining Cerulli reports is available here.