401(k) advisory firms with custom TDFs offer pain, solace to asset managers

Target-date funds built by firms with large networks of 401(k) plan advisers are beginning to gather significant assets, posing a direct threat to some asset managers trying to distribute their own products.

Consider Retirement Plan Advisory Group, a subsidiary of NFP Retirement. The more than 2,000 advisers in the RPAG network have exclusive access to target-date funds called the flexPATH series, created by a company affiliated with RPAG. Over just a three-year period, the funds — launched in mid-2015 — have amassed $6.5 billion.

“It’s impressive,” said Chris Brown, founder and principal of Sway Research, which studies asset management distribution in retirement plans. “They’ve got more assets than most target-date families,” many of which have offered their funds for a much longer period.

RPAG’s TDF assets put it at No. 20 among all target-date providers at the end of 2017, according to Sway Research. (Its analysis considers assets in mutual funds and collective investment trust funds.) Given flexPATH’s rate of growth, there’s a strong chance it will move into the top 15 by the end of this year, Mr. Brown said. For context, Great-West Financial was No. 15 at the end of 2017, with roughly $9 billion in target-date assets, according to Sway Research.

The flexPATH funds are therefore quickly becoming stronger competition for the funds of popular TDF managers, some of whom have been relying on flows into target-date funds to make up for outflows from their other funds.

“I think if you’re American Funds, Vanguard, T. Rowe, this isn’t necessarily good news, because they’d wish advisers were using their target-date series,” Mr. Brown said.

Other large advisory networks have created their own funds, too. In 2015, Pensionmark Financial Group launched its Smartlifecycle funds, which have about $500 million. The funds are distributed through the group’s more than 100 retirement plan advisers.

(More: Asset managers shift 401(k) distribution toward RIA aggregator firms)

Pensionmark is also creating a new share class of the TDFs that would make them available to advisers and defined-contribution plans outside of this network, said Troy Hammond, president and CEO. That initiative is planned for the third or fourth quarter this year, he said.

Global Retirement Partners Advisor Alliance began offering custom TDFs — Foundational Retirement Solutions — to its roughly 475 advisers in October. The funds have $105 million.

“We’re now beginning to actively market this to advisers,” said Jeff Kayajanian, managing partner at GRPAA. “We want to turn this into a multibillion-dollar product.”

These groups claim their custom funds allow advisers to lower investment costs for 401(k) clients — executives say their scale allows the advisory groups to negotiate TDF pricing that’s below that of other products on the market.

However, the fact that these TDFs are multimanager products — meaning they use several subadvisers to manage different portions of the fund — could be welcome news for some asset managers. Firms that haven’t gained traction in their own brand’s TDF product or those who’ve struggled to sell actively managed funds due to the passive-investment craze, could manage assets as a sleeve within these advisory groups’ products instead.

“It gives them a new opportunity,” Mr. Brown said.

Mr. Brown believes more large aggregator groups will launch funds in the future, based on conversations he’s had with those firms’ executives. But not all of them are keen to enter the fray — they’d prefer to distribute third-party funds rather than their own products.

“They see it as a conflict of interest selling their own products,” he said. “They want to remain independent of managing the assets.”