Target-date funds, the all-in-one solution intended to simplify investing for retirement, shook up the industry long ago. But they are undergoing significant changes and financial advisors should pay close attention.
An increasing number of employees are being automatically enrolled in company retirement plans and their money is often allocated to target-date funds. The rate of expansion is finite, but target-date funds are likely to continue to grow in the future, according to a report by Cerulli Associates.
Target-date strategy assets totaled more than $1.7 trillion at the end of 2018 – $1.1 trillion in mutual funds and approximately $660 billion in collective investment trusts, or CITs, according to Morningstar’s 2019 Target-Date Fund Landscape report.
That landscape is changing in more ways than one. Target-date CITs attracted approximately $30 billion last year while target-date mutual fund assets declined roughly $20 billion. It was the first time target-date mutual fund assets declined since 2008, according to Morningstar.
Cerulli expects that trend and others to continue.
The advent of CITs has also delivered more flexibility, lower fees, and a reduced regulatory burden compared to mutual funds. In turn, retirement plan consultants, and financial advisors who generally manage smaller plans, are looking to CITs. Some examples include incorporating a transition to managed accounts, blending active and passive strategies, and creating white-labeled, open architecture products, Cerulli said.
But those changes coming to more defined contribution plans also demand more expertise. CIT minimums might be lower, making the customization more available to more plans, but advisors considering them may only dabble in the space.
The evolution is an absolute improvement overall, said Nicholas Olesen, the director of private wealth at Kathmere Capital Management, a King of Prussia, Penn.-based RIA that manages over $1.1 billion (about $450mm in private wealth and $650mm in retirement plan services).
Still, some advisors might need to decide, in blunt terms, if they are in or out when it comes to defined contribution plans.
“This is becoming more complicated and if you are, as an advisor, being paid to give advice on the plan, you have to develop your skill set. It’s a lot more complicated and there are a lot more moving parts than there have been in the past,” Olesen said.
It’s more than just saving costs, too. Advisors who are fiduciaries to plans need to be subject matter experts capable of critiquing glide paths and other analysis to compare target-date funds, Anya Krymkowski, an associate director at Cerulli, said.
Solely focusing on fund costs in retirement plans is a narrow view with a potential pitfall, Jeff Holt, director of multi-asset and alternative strategies research for Morningstar, told RIA Intel. “There’s no such thing as a passively managed series of target-date funds, even if they only invest in index funds,” he said.
“Each target-date manager makes active decisions when designing a glide path and selecting asset classes, and there’s still material differences in portfolios between series. There’s really no easy way out when it comes to evaluating and selecting a series of target-date funds. The investment team and process must be considered.”