Where are they now and where are they headed?
Mercer is out with topical info on target date products, reminding all involved that “The fact that so many participants simply default into TDFs does increase the importance of the plan sponsor’s selection of the TDF provider.”
The benefits giant finds total target date fund provider assets increased from $1.3 trillion in Q4 2016 to $1.7 trillion in Q4 2017.
The largest target data provider (unnamed, but easy to guess) now has a 36 percent market share and almost 2.5 times its nearest competitor.
While AUM growth is strong overall, “there’s continued evidence that assets still roll out of TDFs around retirement, and some evidence this could be happening earlier than retirement,” Mercer notes.
Unsurprisingly, given all we know from behavioral economics, TDFs still have a strong home (meaning U.S.) equity bias.
Also unsurprisingly, fee compression continues, “but focusing on fees alone may not be in participants’ best interests. The difference in performance of TDFs is more significant than the difference in fees,” the report adds.
Somewhat concerningly, and despite the plan sponsor investment “unbundling trend,” the majority of TDF providers continue to construct their TDF portfolios using proprietary funds as the underlying investments (i.e., using a closed architecture approach), Mercer says. It reports that, over 2017, the percentage of assets invested in closed architecture solutions slightly increased from 92.1 percent to 92.3 percent.
“Finally, it will be interesting to watch future developments or threats to the dominance of TDFs,” the report concludes. “The one limitation of TDFs is they do not take into account individual circumstances. We are beginning to see alternative solutions coming to market that tailor asset allocations to individuals, and through the advent of technology can do so without needing participant engagement. Some of these products are in their early development, but it is worth watching this space.”