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Advisors Can Help Asset Managers Fill ‘Advice Gap’ on Target-Date Funds

Someone has to explain new, complex, lesser-known products. It's time for advisors to prove their retirement chops.

The tide is going out. 

After years of the defined contribution industry focusing on the accumulation phase of retirement planning, the decumulation phase is attracting greater attention from plan sponsors as Baby Boomers enter retirement. 

Given this structural headwind, in order for providers of target-date products to innovate they will need to explain new, complex, and lesser-known products, while offering customized retirement solutions to participants, according to a new report from Cerulli Advisors. Financial advisors can play a key role in filling this “advice gap,” by helping to explain important features, limitations and associated fees, the report states.

“The environment is challenging to navigate as an asset manager,” says Anastasia Krymkowski, associate director at Cerulli Associates. “That said, given the sheer volume of target-date contributions, it still pays to represent a small slice of a big pie.” 

The report states that advisors can help providers succeed in the Qualified Defined Investment Alternatives (QDIA) space by helping differentiate their products while better serving participants in a cost-effective manner.

Because the 401(k) market is heavily intermediated, plan sponsors are not the primary influencer in any asset segment, says Cerulli. Instead, “recordkeepers and financial advisors are the most influential intermediaries in the micro plan asset segment while retirement specialist advisors dominate in the small segment.”

Cerulli notes that retirement aggregators, such as Captrust and SageView, are prominent in the $25 million to $500 million plan asset range.

The report states that although the 401(k) industry as a whole is experiencing outflows, as of year-end 2018, target-date assets attracted 58% of 401(k) net flows and continue to grow organically. 

Asset managers, however, face a major challenge given that the five leading target-date managers own 77.5% market share and target-date funds have experienced a “drastic shift from active to passive management.”

The report states that about half of investors age 40 to 69 don’t have a source for investment advice or rely on media or family for information. The report adds that the advice gap is “particularly acute” for those less wealthy.