Many plan sponsors are shifting away from recordkeepers’ target-date funds to nonproprietary versions. But others are still using yesterday’s model. We think it’s time to take a look around.
THE BACKSTORY: PPA AND A BOON FOR RECORDKEEPERS
Target-date funds’ popularity started to take off when the Pension Protection Act of 2006 included them in its list of qualified default investment alternatives (QDIAs) to be granted “safe harbor,” a safeguard from fiduciary liability for investment outcomes.
This legislation was a boon for asset managers that were also recordkeepers, who benefited by offering sponsors a simple solution: prepackaged, proprietary target-date funds with pricing that is bundled with the plan’s administrative costs. Many sponsors went the recordkeeper route because options were limited at the time and it was the path of least resistance.
THE SHIFT IS ON—AWAY FROM PROPRIETARY
Fast-forward to 2016, a year that saw target-date assets swell to $880 billion, according to Morningstar, with a lot more variety to choose from. Many sponsors, especially among large plans, are searching for—and finding¬—funds that are a better fit for their plans.
Multiple surveys confirm the trend away from recordkeepers’ target-date solutions. A 2016 Callan Associates survey found that only about 25% of plan sponsors expected to use their recordkeepers’ target-date funds last year, down from nearly 70% in 2011.
SEI’s Defined Contribution Research Panel also noted the shift, pointing out that larger plans tend to be more likely to deviate from their recordkeepers’ target-date funds. According to the panel, nearly two-thirds of mega plans (over $1 billion in assets) went the nonproprietary direction. In contrast, only one-third of small plans (under $100 million), which typically have limited flexibility, used nonrecordkeeper target-date funds.
Our findings echo the shift to separating the recordkeeper decision from the target-date decision: in our 2011 plan sponsor survey, 61% of sponsors who used target-date funds said they offered the recordkeeper option; in 2016, only 41% did (Display).