Target-date fund managers evolve to capture burgeoning 401(k) market

Over the last several years, TDFs have crafted new strategies and engaged in a marketing bonanza to stand out from the competition

Dec 5, 2016 @ 4:04 pm

By Greg Iacurci

For providers of target-date funds, it's no longer enough to be a one-trick pony.

Over the last several years, TDF managers have engaged in a marketing bonanza of new products to stand out in an increasingly competitive — and lucrative — 401(k) marketplace.

Examples of such activity include providers launching funds with different investment strategies, investment vehicles and asset allocations, as well as coupling existing strategies with more passive management to drive down cost.

Take BlackRock Inc. Last month, the asset manager converted its LifePath Active TDF series into a smart-beta-focused series called LifePath Smart Beta, with an exposure of 80%-90% in underlying smart-beta exchange-traded funds.

BlackRock has the only existing TDFs touting smart-beta explicitly in their name, and has distinguished itself in a largely unoccupied market niche, according to Jeff Holt, multi-asset analyst at Morningstar Inc.

It's the most recent of many examples of asset managers looking to differentiate to try capturing a piece of the roughly $860 billion target-date mutual fund market.

“[It's now] more common to offer different flavors of a strategy or completely different strategies within a fund manager to suit the potential demands of different clients,” Mr. Holt said. “It wasn't always like that.”

Target-date mutual fund assets 2006-16
Source: Morningstar
* Through Oct. 31.

Since the Pension Protection Act of 2006 gave employers legal protections for using TDFs as a default investment in 401(k) plans, the funds have become plans' default of choice and assets have skyrocketed.

Research firm Cerulli Associates estimates TDFs will capture roughly 90% of all new 401(k) contributions by 2020. With such big money at stake, firms are trying to stand out.

Wells Fargo & Co. is another fairly recent example. In November last year, the firm expanded its TDF offering with its Dynamic Target series, which represents a vast departure from its Dow Jones Target funds in several respects, such as use of active management and a more aggressive glide path. It launched the Dow Jones series two decades ago.

Dimensional Fund Advisors came to market that same month with its first TDFs — the Target Date Retirement Income Funds — which use a liability-driven-investing strategy, investing heavily in Treasury Inflation Protected Securities.

Others such as BlackRock, Fidelity Investments, Charles Schwab, Voya Financial and TIAA have debuted indexed series as companions to more actively managed ones, while Pacific Investment Management Company and JPMorgan Chase & Co. have launched active-passive blend strategies to push down fees in an increasingly cost-conscious 401(k) market.

In August, Charles Schwab launched an index series that, at 8 basis points, made it the lowest-cost provider on the market.

It's also not uncommon to see firms diversify by offering strategies in both mutual funds and collective investment trust funds, to cater to different tastes, Mr. Holt said. State Street Global Advisors, for example, launched its TDFs in a mutual-fund wrapper in 2014, when its CITs had already been around for a decade.

And some, such as AllianceBernstein and Charles Schwab, have developed multi-manager series, which use various investment sub-advisers and present an alternative to series that invest strictly in underlying proprietary funds.

“I think the biggest driver of this is just the amount of assets flowing into these funds,” according to Sean Deviney, an adviser who heads the retirement plan group at Provenance Wealth Advisors. “That's where every single [defined contribution investment only] wants to be. And that's where all the DCIO wholesalers are focusing their attention, on their TDFs.”

DCIO refers to the divisions at asset management firms focusing on DC plans.

Indeed, if it weren't for positive flows into target-date funds, firms such as T. Rowe Price and American Funds, which traditionally lean more on active management, would have had net redemptions at the firm level in 2015, according to Morningstar.

Asset managers' increased focus on TDFs has led to some positive evolution in the market, through a reduction in fees and more focus on how a fund's glide path (or, how a fund's asset allocation changes over time) affects particular employee populations, Mr. Deviney said.

However, he believes some of the so-called differentiators touted by asset managers don't add value beyond a traditional TDF.

“A lot of this stuff is a bunch of crap,” Mr. Deviney said. “It sounds fancy but isn't adding much value beyond a traditional target-date fund; it's just making some minor changes inside of them and calling it innovative.”

Such bells and whistles make it more difficult for plan advisers to complete due diligence with fund selections, especially when considering TDF benchmarking is already more complex than with other funds like large-cap funds.

Rather than pay attention to the "marketing" components, advisers should focus on understanding how the glide path changes over time, how that relates to an employee base, the diversification of underlying managers, performance and cost, Mr. Deviney said.

Firms with multiple target-date mutual fund series
TDF series* Inception date**
BlackRock LifePath Dynamic Mar 1994
BlackRock LifePath Smart Beta Apr 2007
BlackRock LifePath Index May 2011
Fidelity Freedom Oct 1996
Fidelity Freedom Index Oct 2009
Fidelity Multi-Manager Dec 2012
JHancock Retire Living through Oct 2006
JHancock Retirement Choices Apr 2010
JHancock Retire Living thru II Nov 2013
JPMorgan SmartRetirement May 2006
JPMorgan SmartRetirement Blend Jul 2012
PIMCO RealPath Mar 2008
PIMCO RealPath Blend Dec 2014
Principal LifeTime Mar 2001
Principal LifeTime Hybrid Sep 2014
Schwab Target Jul 2005
Schwab Target Index Aug 2016
T. Rowe Price Retirement Sep 2002
T. Rowe Price Target Aug 2013
TIAA-CREF Lifecycle Oct 2004
TIAA-CREF Lifecycle Index Sep 2009
Voya Solution Apr 2005
Voya Index Solution Mar 2008
Voya Target Retirement Dec 2012
Wells Fargo Dow Jones Target Mar 1994
Wells Fargo Dynamic Target Nov 2015
Source: Morningstar
* TDF series name and strategy may not be the same ones used on the inception date. For example, BlackRock LifePath Smart Beta was originally called BlackRock LifePath Active, and made the switch in November 2016.
** Inception date represents the funds' oldest share class

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