Large advisory shops build custom target-date funds

Firms can deliver funds at a lower cost, but some raise concerns about conflicts

Mar 19, 2017 @ 12:01 am

By Greg Iacurci

Advisory practices with tens of billions in defined-contribution-plan assets are building custom target-date funds for advisers to use with clients, leveraging their scale to deliver low-cost funds to even the smallest retirement plans and, in the process, creating something of a marketing tool.

"I do see it as kind of a trend," said Todd Stewart, director of investment research at SageView Advisory Group, which advises on $70 billion in DC assets and is considering building custom funds. "It seems like more advisory firms are offering the solutions, and we're getting more questions about them when we talk to plan-sponsor prospects."

NFP Corp. has had the most traction to date. The firm's flexPATH Strategies funds, which launched in June 2015, hold $3 billion in assets among roughly 300 clients.

Pensionmark Financial Group's funds, which debuted around the same time, in April 2015, have $300 million. And Global Retirement Partners is launching its series in the second quarter this year.


While each advisory firm's approach differs from the others, there is a common denominator: low fees.

The firms use their scale to pool retirement plan assets in the funds and drive fund costs below those of a typical TDF. Use of collective investment trust funds, rather than mutual funds, as an investment vehicle drives further cost efficiencies, firm executives said.

As an example of scale, NFP's network of advisers oversees $300 billion; the majority is through its Retirement Plan Advisory Group, a wholly owned subsidiary, which comprises a network of about 400 independent advisory shops servicing 28,000 retirement plans with an aggregate $200 billion in assets. Similarly, GRP has $200 billion in retirement plan assets across its advisory network, and Pensionmark Financial Group has $40 billion.

As is the case with any investment in a DC plan, lower costs most acutely benefit the small-plan market.

Participants in 401(k) plans with more than $1 billion in assets pay an average TDF fee of 46 basis points, on an asset-weighted basis, while those in plans with between $1 million and $10 million pay close to double, at 81 bps, according to a joint study by BrightScope Inc. and the Investment Company Institute. By comparison, GRP's funds will range in price from roughly 9.5 bps to 35 bps, depending on the chosen TDF suite, and are available to any plan size, GRP founder William Chetney said.

"We can bring scale to the retirement plan in the mid to small marketplace," said Barbara Delaney, founder and principal at StoneStreet Advisor Group, a GRP member firm.

Similarly, Pensionmark's TDFs, which are passive funds managed with an eye toward volatility reduction, cost about 29 bps, said Troy Hammond, president and CEO.

Executives say the funds help their respective firms stand out both among advisers and plan sponsors.

"It's designed to be a differentiator for our advisers out in the marketplace," Mr. Hammond said. "We've earned clients from it, for sure. It's been a huge competitive advantage."

Such activity is occurring as participant assets in the funds have ballooned, and TDFs have become employers' default fund of choice. Target-date mutual funds held $880 billion at the end of 2016, up from $116 billion a decade ago, according to Morningstar Inc.

In an increasingly crowded marketplace of about 60 different target-date mutual fund series, asset managers have attempted to stand out by launching funds with lower costs and different investment strategies, investment vehicles and asset allocations.

Some observers are wary of potential conflicts of interest that may arise from advisers recommending their firm's TDFs, particularly if the advisory firm receives compensation from the funds.

Mr. Stewart of SageView said that the firm has been mulling whether to offer its own custom funds, and that compensation has emerged as "the main hurdle."


"We don't think at this point that we could build in revenue for ourselves into a CIT that would not ultimately create a conflict of interest for us in working for our clients," he said.

NFP, for example, outsources the funds' glidepath construction to BlackRock Inc., but receives a fee for serving as an investment fiduciary, selecting and monitoring the underlying money managers, said Nick Della Vedova, president of NFP Retirement.

"We're delivering an additional service to a client, and that's something the client chooses to use or not use," he said.

The TDFs are available in either a fully passive strategy or a blended strategy (called Index+), and with three different glidepaths.

A fund fact sheet for the R1 fund class of the flexPATH Index+ Aggressive Retirement Fund lists NFP's sub-advisory fee at 10 bps, out of an overall fund cost of 43 bps; the indexed version's sub-advisory fee is 5 bps out of a total 19 bps.

GRP and Pensionmark outsource both investment management and glidepath construction to third parties, and don't receive compensation through the funds.

Mr. Stewart believes there still could be the perception of a conflict, even without earning compensation. But firm executives stress their advisers will, as fiduciaries, select another fund for clients if there's a better fit.

"The reality is, we don't sell it to everybody," Mr. Hammond said. "If the fund isn't the right solution and off-the-shelf is more appropriate, we'll make that recommendation."


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