Some active target-date fund managers shine as passive management continues 401(k) onslaught

While passive management continued its steady climb in the target-date fund market, a few asset managers with actively-managed TDFs managed to outshine their indexing counterparts in 2016. Target-date fund assets held by passive managers, led by Vanguard Group, in mutual funds and collective investment trust funds for the first time surpassed those held by active managers last year, according to Sway Research, which studies asset management distribution in defined contribution plans. However, providers such as Capital Group (which oversees the American Funds brand) and American Century Investments, which actively manage their portfolios, saw the biggest percentage gains in total TDF assets among the top 10 providers. American Funds had 51% growth over 2015, to $53.6 billion in assets, and American Century had 27% growth, to $19.6 billion, according to Sway data. "American Funds in particular, those assets are up a phenomenal amount year-over-year," said Chris Brown, founder and principal of the Newton, New Hampshire-based research shop. Only Vanguard, which with $449.8 billion in target-date mutual fund and CIT assets is the undisputed industry titan, rivaled their percentage growth, tying American Century at 27%. (In dollar terms, Vanguard led with $96 billion in growth.) Although other active managers such as T. Rowe Price, J.P. Morgan and TIAA also made sizable gains last year, passive managers have continued their onslaught in DC plans, as they have in the broader market for asset management.

"It's like a perfect storm," said Jamie Greenleaf, principal at the retirement plan advisory shop Cafaro Greenleaf, based in Red Bank, NJ. "The markets have been really good to us the last eight years, so being in an index has made perfect sense." The importance of fee transparency and the threat of lawsuits over plan fees have also driven employers and advisers to seek out the lowest-cost options, Ms. Greenleaf said. Some employers have adopted hybrid TDFs, which use a blend of active and passive underlying funds, to gain cost efficiencies while still having active exposure, she added. "A lot of the plan intermediaries I've talked to haven't necessarily given up on active, but right now when they're competing for new plans, the way they're winning new business is by undercutting the old plan on fees," Mr. Brown said. "It's a tough time to be an active manger right now." The target-date market has grown increasingly competitive for asset managers over the past decade, as participants stash money in the funds with greater regularity. The research firm Cerulli Associates estimates the funds will capture roughly 90% of all new 401(k) contributions by 2020.

Some active managers have managed to ink strong growth in spite of the passive-management trends, due partly to brand loyalty as well as advisers to whom using the lowest-cost fund isn't a primary motivator for decisions, Mr. Brown said. Although Walt Best, institutional national sales manager at American Funds, feels the firm can compete on fees, too. The firm's lowest-cost share class (the R6 share class) of its 2020-dated fund is 0.37%. Passive products such as ones sponsored by Charles Schwab Corp., Vanguard and Fidelity have a price tag of roughly 10 basis points. Asset managers that also have DC-plan record-keeping divisions, which encompasses all active TDF managers with the exception of American Century, have a leg-up in fund distribution. Use of a record keeper's proprietary TDFs is on the decline, though, among plan sponsors. American Funds, for example, has a small- and micro-market record-keeping product, but the majority of its TDF distribution growth last year was through its non-record kept plans, Mr. Best said. Only 25% of its total TDF sales were through its record-keeping platforms. TDF managers have tried standing out through product differentiation as the market grows increasingly crowded, through different investment strategies, investment vehicles and asset allocations, for example. Some managers have debuted their mutual fund strategies in CITs, and vice versa, to try expanding their reach. Assets in target-date CITs grew at nearly twice the rate of mutual funds in 2016, and now account for 34% of target-date assets, according to Sway data. American Funds is a bit of an outlier in this regard among the largest providers, because all its assets are held in mutual funds.