A growing number of retirement plan savers are moving away from active target-date funds (TDFs) and instead choosing blend or passive alternatives.
Findings from NEPC’s Defined Contribution (DC) Plan Trends Survey analyzed shifts in plan participant behavior, including how accountholders are investing retirement savings.
According to the findings, in recent years, NEPC clients have transitioned away from active TDFs. While 19% of plans today offer active funds, most offer blended (22%) or passive (59%) investments, “reflecting lower implementation fees and increased glidepath risk-level flexibility available from passive providers,” the report observed.
“As target date funds represent a growing share of participant assets and contributions, plan sponsors are placing greater emphasis on glidepath construction, cost efficiency, and how default strategies address longevity risk,” said Emma O’Brien, partner at NEPC.
Further, increases in index concentrations have led DC plan sponsors to change their US large cap equity options towards passive strategies, NEPC adds.
Managed account terminations
The research also makes light of a growing number of dissolutions with managed account services.
While managed account saw an increase in usage in 2022 and 2023, engagement with the funds has since dipped.
According to the findings, over the last three years, 14% of DC plans have terminated managed accounts as they embark on “more formal fiduciary reviews” due to intensifying fee sensitivity and closer assessments of participant engagement and personalization.
Interest in alternative investments
As the Department of Labor (DOL) prepares to release its formal rule on alternative funds in 401(k) plans, interest in the investments continues to grow among plan sponsors and participants.
NEPC’s findings show that 21% of DC plans today use custom solutions, with private real estate leading as the most commonly used private asset at 58% of custom TDF clients.
Other private assets, like private equity and private credit solutions, have seen smaller upticks due to concerns over fees, liquidity, operational complexity, and participant suitability, finds NEPC.
“Where private assets are used, sponsors tend to incorporate them selectively through custom solutions,” said Mikaylee O’Connor, partner and DC Team Leader at NEPC. “The emphasis remains on understanding how these assets function within a DC framework and ensuring they align with fiduciary objectives.”