I have been researching target date strategies or their equivalents since the late 1990s, and one of my team’s roles at Mercer is to review the U.S. TDF market. We seek to do this comprehensively, from a number of vantage points:
With regard to the latter point, we recently released our Target Date Funds Highlights and Trends 2018 and Q1 2019 Update. While we usually look at TDF trends at the end of each calendar year, we extended our focus period through Q1 so that we could compare our survey of “off-the-shelf” TDFs with the results of the DCIIA Custom Target Date Fund (cTDF) Survey.
It has been amazing for me to see how the TDF market has grown and evolved, particularly since 2006 when the Pension Protection Act blessed the TDF as a Qualified Default Investment Alternative (QDIA) and provided a “safe harbor” for plan sponsors. Our latest findings illustrate how much the TDF landscape has changed.
Morningstar recently analyzed the persistency of default options and concluded that “participants who accept the default tend to be younger and have lower plan tenures, lower incomes, lower plan balances, and lower savings rates.” Given the observation that TDFs are often used by less engaged participants (by default), and by participants who potentially may be more financially vulnerable, plan sponsors should ensure they are continually reviewing and documenting their TDF selection and monitoring processes.
Following the due diligence tips the U.S. Department of Labor (DOL) issued in February 2013 is a good place to start. Several recent court cases directed at target date strategies reinforce the importance of continually evaluating the suitability of a Plan’s target date selection.
Looking forward, one wonders whether the target date market can continue to display such dominance within the retirement plan industry. To be sure, there have been some big winners, but others struggle to compete. This year alone, we know of at least three TDF providers that have found it challenging to attract assets and no longer offer TDF series. A fourth provider closed its more expensive TDF series and now offers only a hybrid version.
Two issues that could cause significant disruption within the TDF space are the increasing desire for more personalized solutions — a need that TDFs structurally do not address, and the growing interest in retirement income solutions. Guaranteed retirement income features have not found a foothold in the manufacturing end of the target date market, but we are seeing increasing interest from plan sponsors to at least discuss such options. Whether discussions lead to action, only time will tell.
Hear our perspectives on the latest retirement news and trends. Receive articles directly in your inbox as soon as they are posted.
Please see Important Notices for further information.
1 David Blanchett and Daniel Bruns, “Which Default Investment is the Stickiest?” Morningstar Investment Research LLC.
Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant, and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.