401k Plan Sponsors Reject Proprietary Fund Products

Use of non-proprietary TDFs offered by outside asset managers increased

401k, mutual funds, BrightScopeProprietary funds are on the decline.

Proprietary funds continue their 401k-market share decline.

In the longest opening sentence we’ve seen in some time, a “new in-depth study conducted jointly by AllianceBernstein and BrightScope reveals a dramatically shifting target-date landscape where recordkeepers who offer their own target-date funds–known as ‘proprietary’ funds–are losing share of assets on their own platforms as plan sponsors are increasingly choosing funds from other providers given the increased array of solutions that offer benefits such as enhanced diversification, lower fees, multiple managers, etc.”

Since 2009, plan sponsors have cut back on using recordkeepers’ proprietary TDFs, with the share of recordkeepers’ proprietary assets declining from 59 percent to 43 percent.

Conversely, the use of non-proprietary TDFs offered by outside asset managers increased by 16 percent.

“The trend depicts a very different landscape from that in 2006, after the Pension Protection Act was passed and led to a boon for recordkeepers who benefited from offering prepackaged, proprietary TDFs with prices bundled with the plans’ administrative costs,” according to the companies.

Today, however, large plans are leading the migration to TDFs other than their recordkeeper’s offering as they decouple their recordkeeper choice from their target-date selection.

In the largest plans (over a billion dollars in assets) the penetration of proprietary TDFs is the lowest at 31.7 percent, compared to 38.4 percent in 2009.  However, more than half of smaller plans (under $100 million in assets) that have limited flexibility still use recordkeeper TDFs.

“Our data suggests that we have now entered a new era of target-date funds—this means new players and a greater appetite for considering a variety of target-date offerings outside of a recordkeeper’s proprietary TDF, which is likely a result of the increasing importance of fees, transparency and investment performance in DC plans,” Brooks Herman, vice president of Data and Research at Strategic Insight, said in a statement

Competition is also more crowded in the target-date market.

The number of target-date providers has risen 16 percent from five years ago, as more and more asset managers started offering new target-date solutions.

About 78 firms offer more than 139 different target-date fund series currently.

The research shows the use of collective investment trusts (CITs) has gained in DC plans, with some recordkeepers likely introducing CITs or other passively-managed target-date funds to respond to fee pressures and maintain proprietary share.

Since 2009, the use of CITs in TDFs has nearly doubled from 29 percent to 55 percent. T

The study indicates major recordkeepers including Vanguard and T. Rowe Price have both seen assets invested in target-date mutual funds shift meaningfully to target-date CIT series in a relatively short time.

Key findings include:

TDFs assets have grown 27 percent annually over the past few years

Between 2009 and 2014, the number of plans using target-date funds has grown by 16 percent and assets have grown by 229 percent, with significant growth in larger plans with more than $500 billion in assets.

Large plans ahead in the shift to nonproprietary target-date funds

Use of recordkeeper proprietary TDFs is higher for smaller plans, with larger plans ‘unbundling’ their TDF decision from their plan administration decision. In the very largest plans with over a billion dollars in assets, the penetration of proprietary target-date funds is the lowest at 31.7 percent, down from 38.4 percent in 2009 and 34.4 percent in 2013.

Non-proprietary target-date solutions gaining steam

Recordkeepers’ ability to capture share in their own proprietary TDFs has been declining since 2009 while use of non-proprietary TDFs is increasing. As a percentage of recordkeepers’ target-date assets, proprietary fund share has tumbled from 59 percent to 43 percent.

Most have lost proprietary target-date fund share since 2009, and only three increased their share (Nationwide, Empower and Hancock).

On the other hand, the share of non-proprietary target-date funds on platforms has leapt from 25 percent to 41 percent.

More plans are choosing collective investment trusts

From 2009 to 2014, the use of target-date collective investment trusts (CITs) nearly doubled as a percentage of target-date assets, from 29 percent to 55 percent.

Meanwhile, target-date mutual funds saw their usage fall from 68 percent to 42 percent over the same period.

Successful TDF managers no longer dependent on own platforms

Instead, they have focused on placing their target-date funds on other recordkeepers’ platforms, broadening distribution.

Vanguard, T. Rowe Price and Wells Fargo, for example, had a much lower percentage of target-date assets on their own recordkeeping platform in 2014 compared with 2009 but have grown their overall share of the market.

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