Target date competition is tough and getting tougher, so what’s an investment manager looking to break into the space to do?
Global research and consulting firm Cerulli Associates finds that given the intense competition and high barriers to entry in the target-date market, defined contribution investment sector, asset managers should assess their distribution opportunities as they relate to standalone investment options on 401k menus.
“In 2016, 401k assets held in target-date funds surpassed $1 trillion, benefitting from double-digit year-over-year growth dating back to 2012,” Daniel Cook, analyst at Cerulli, said in a statement. “However, the impressive growth trajectory of the target-date market does not necessarily equate to an easily accessible asset-gathering opportunity for managers.”
“DC asset managers face several challenges to participating in the target-date market, including acute fee pressure, increased demand for passively managed products, and dominance of the largest competitors,” Cook added. “While some asset managers perceive that there is opportunity to manage investment sleeves in open-architecture target-date funds, the scope of this opportunity may be overestimated.”
Of the top-five target-date providers, which collectively control a substantial portion of market share, four exclusively offer products that are closed to nonaffiliated managers.
This lends further support to the notion that asset managers should consider their distribution strategies outside the target-date market.
According to data from Cerulli, 65 percent of asset managers identify “manager for standalone core menu option” as a major opportunity to gain DC assets during the next 12 months.
“As of year-end 2016, total 401k plan assets reached nearly $4.7 trillion and, after subtracting target-date funds, balanced funds, target-risk funds, and corporate stock 401(k), assets held in standalone investment menu options totaled roughly $3.1 trillion,” explains Cook. “For perspective, the $3.1 trillion held in 401k standalone menu options is greater than the entire corporate defined benefit market ($2.9 trillion).”
This represents a sizable opportunity for asset managers capable of distinguishing themselves and establishing relationships with key decision-makers in the 401k market.