It was once so simple. Order a 401(k) with a certain plan provider and/or record-keeper and they just happen to have the investment menu you need to fill it. Now, however, that strategic positioning they enjoy when offering proprietary products is eroding, at least with target date funds.
A new report Cogent finds that half of all advisors selling 401(k) plans now recommend an external manager for target date funds rather than the proprietary target date funds offered by the plan record-keeper. What’s more, the likelihood of recommending external target date offerings increases by the level of 401(k) production, with nearly six in 10 specialists managing $50 million or more in defined contribution AUM advising plan sponsors to look beyond current plan providers and include target date funds offered by external asset managers instead.
According to the annual report, titled Retirement Plan Advisor Trends, 41% of 401(k) advisor recommend a target date or lifecycle fund as the plan’s default investment option, more than twice the number who suggest any other type of qualified default investment alternative, signaling that TDFs are now the principal investment choice among advisor-sold plans.
“This is the first year that we’ve seen plan advisors championing proprietary and non-proprietary options equally, which underscores how competitive the target date market has become,” Sonia Sharigian, senior product manager and report the report’s coauthor, said in a statement. “Full-service plan providers cannot rely on assets simply flowing in because they are the incumbent record-keeper. Now more than ever, plan providers need to compete with a crowd of other DC investment managers, who will likely to have more opportunity to showcase their target date solutions.”
The report finds that target date funds are the second most popular investment options that advisors include in their recommended lineups, after traditional, actively-managed mutual funds. In addition, nearly three-quarters (73%) of established DC advisors also recommend index funds to their clients, up from 64% in 2014.
“The move toward external target date providers, along with the increasing popularity of index funds, shows that retirement plan advisors are acknowledging their clients’ concerns of managing plans more responsibly, including seeking the best overall value for the money,” added Linda York, vice president at the firm. “Among the elite group of DC specialists, we find strong preference for both active and passive target date fund providers, indicating that asset managers will not only need to compete on performance and price, but also find ways to further differentiate their target date offerings in the marketplace.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
