Legg Mason hopes to reverse TDF fortunes with MassMutual deal

The firm tried launching two different target-date series within the past decade, both of which closed after failing to gain much traction.

Legg Mason is making another attempt at breaking into the target-fund market through a partnership with Massachusetts Mutual Life Insurance Co., a move that hints at the challenges asset managers have faced in 401(k) distribution and emerging strategies to overcome them.

Legg Mason today debuted its Total Advantage target-date funds, a series of collective investment trust funds with 16 underlying investment managers and a 60-40 split between active and passive management. MassMutual will distribute the funds over its record-keeping platform, manage a stable-value investment sleeve within the funds and provide access to several third-party asset managers, executives said.

The funds, sub-advised by Legg Mason affiliate QS Investors, also focus on minimizing market risk for participants in the five-year periods before and after retirement. All combined, Legg executives hope to gain traction among 401(k) plans and advisers.

“We finally partnered with a record keeper, we have low-cost CITs and we have this dynamic risk management in place,” said Will Coleman, managing director and head of retirement solutions at Legg Mason.

A Legg Mason affiliate sub-advises a target-date series for Transamerica Corp., a retirement-plan record keeper, but the company hadn’t previously partnered with another firm regarding its proprietary TDFs.

Legg has struggled to gain traction in the TDF market over the past decade. It launched a mutual fund series, Legg Mason Target Retirement Funds, in 2008, but liquidated the funds six years later when they had roughly $50 million in assets. Legg then rebranded the funds as the Roadmap funds, a series of CITs, but closed them in February. The Roadmap funds had $71 only million at the end of 2017, according to Sway Research.

MassMutual, which currently offers the RetireSmart TDFs, hasn’t seen huge success either — it manages $2.5 billion in target-date mutual fund assets, putting it at No. 21.

In many ways, Legg Mason’s struggles in the target-date fund market are emblematic of broad trends playing out in the 401(k) industry.

The company, primarily an active manager, has been fighting against the headwind of the passive-management craze among 401(k) and retail investors. Nearly 95% of the $70 billion in new flows to TDFs last year went to those series investing primarily in index funds, according to Morningstar Inc.

In addition, the companies that have had the most success in garnering TDF assets get distribution through their own record-keeping divisions. For example, Vanguard Group, Fidelity Investments, T. Rowe Price and American Funds, the four largest target-date mutual-fund managers, all have record-keeping platforms.

“There are a lot of firms that are wrestling with this right now,” said Chris Brown, founder and principal of Sway Research, who explained that the hope was that such firms would open up their TDFs to third parties like Legg Mason as underlying fund managers. “But it hasn’t happened.”

The cost of failure is stark — target-date mutual funds, which have become the default 401(k) investment of choice, hold more than $1 trillion and are only expected to become more dominant. Those left behind risk dwindling into insignificant players in the defined-contribution-plan market.

Companies have tried to combat headwinds by expanding their fund offerings — offering strategies in both mutual funds and collective trusts, which often come with a lower price tag; some series are also geared more toward active management and others more passive, for example. Active managers have tried lowering fees to compete. Others are trying different marketing messages — BlackRock, for example, renamed its funds to tout a smart-beta focus.

Legg Mason’s message will focus on the importance of hedging against an impending market downturn.

“The market has gone straight up for nine years,” Mr. Coleman said. “I’d be personally very nervous if I didn’t have some sort of downside protection built into it. And I think that will be our message.”

In the five years before and after a fund’s target date, the new series will reallocate participants’ money from risky assets to fixed income and stable value assets as the market becomes more volatile and continues to lose money, Mr. Coleman said.

The funds will be managed by several Legg Mason affiliates, MassMutual, and third-party managers to which MassMutual provided access through agreements it has in place, said Ken Verzella, an executive in MassMutual’s workplace solutions group.