Is it important to offer more than one target-date product to meet the needs of 401(k) plan sponsors in the United States?
Yes, according to Cerulli Associates.
“Cerulli estimates that as of year-end 2015, target-date assets held in 401(k) plans surpassed $900 billion,” Jessica Sclafani, associate director of the Boston-based research and consulting firm, said in a statement. “The importance of an asset manager’s strategy for participating in the target-date fund market has only grown and shows no sign of decreasing.”
“Two DC plans in the same industry and with similar employee demographics may arrive at very different target-date choices based on contrasting priorities for the plan,” Sclafani explained. “As a result, some of the more successful target-date providers are concluding that it is necessary to offer more than one off-the-shelf target-date product to meet DC plan sponsors’ varied needs.”
In 2013, the Department of Labor (DOL) suggested plan fiduciaries revisit their target-date fund selection and consider non-proprietary target-date funds. While the DOL does not use the term “open architecture,” its description of the potential benefits of a non-proprietary target-date fund align with the industry’s understanding of an open-architecture approach.
Based on a Cerulli Associates 2016 proprietary survey of target-date providers, the open- versus closed-architecture paradigm represents a potential area of opportunity as target-date providers consider expanding their product suite.
That said, the company notes that it’s important for plan sponsors to “look beyond these labels, such as open versus closed.”
“Open-architecture target-date funds do not always diversify plan participants’ exposure to a single manager to the degree that the open-architecture label suggests,” Sclafani added. “Open-architecture target-date products seem to resonate with the consultant community, who are quick to point out the potential risks of concentrated exposure to a single asset manager.”
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.
