New findings today from the NEPC show that target-date funds (TDFs) remain the dominant investment option among defined contribution (DC) plans.
The organization’s latest Defined Contribution (DC) Plan Trends and Fee Survey, which surveyed 128 clients representing $259 billion in aggregate assets and 2.6 million plan participants, reports that 86% of respondents currently offer a TDF paired with systematic distributions to their participants. Ninety-seven percent of clients offer target-date fund options, and 96% use the vehicle as the qualified default investment alternative (QDIA).
TDFs also represent almost half (47%) of all plan assets and are especially popular among participants under the age of 35 and over 65-years-old, with 72% and 53% contributing to the funds, respectively.
While recent findings show an uptick in managed account usage, NEPC’s report indicates that TDFs are still the the top option among plan sponsors and participants alike. According to the findings, 43% of clients offer managed accounts, 5% of participants use the investment vehicle, and 4% of assets are invested with managed accounts.
“Our job as retirement consultants is to maximize the solutions that work for the most people and operate around the margins,” says Emma O’Brien, a principal on NEPC’s DC team, in a statement. “The data shows that, contrary to the media’s perception, we don’t need to reinvent the wheel because Target Date Funds work.”
As a result of high demand for TDFs, core options—like cash, bonds, and stocks—are declining in usage. Compared to 2010, when 72% of assets were allocated to core options, today just 53% of assets are distributed to the core menu. On the other hand, TDFs have rose from 28% in 2010 to 47% in 2023.
NEPC believes that participants are decreasing their core menu allocations in order to free themselves from too many investment options and the fees that come with them.
Other trends include a rise in environmental, social, and governance (ESG) investing among DC plans. According to the findings, 87% of DC plans utilize ESG factors as part of the investment process, and 25.4% of DC assets are invested in sustainable factors.
Declines in managed account fees are also trending, as costs dropped more than 10% over the past year due to an increase in lower cost providers, reports NEPC.
“Fees have come down because we are actively pushing for lower costs,” says Bill Ryan, partner and head of NEPC’s DC team. “As a team, we have spent a lot of time educating clients on the role of managed accounts, what personalization means, and what level of personalization is right for them. All of those discussions have pointed to fees, negotiated or not, being too high.”
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