Target-date retirement funds will represent nearly half of the total $7.7 trillion in U.S. defined contribution assets by 2020, and low-cost passive funds along with innovative, customized active accounts will be the fastest-growing strategies adopted by investors, squeezing out the currently dominant mutual funds. That's the forecast of Casey, Quirk & Associates, a consulting firm to the global asset management industry.
"The simple explanation is that they have become the qualified default option for plan sponsors; automatically, if you don't make an election, you get defaulted into a target-date and a lot of participants stick with the default option," says partner David Bauer. "There are a lot of different channels and products that are being developed; it's much more complex today than when it was a menu-driven market."
By 2020, assets invested in passive strategies and innovative active portfolios will capture an increasing share of the overall target date market, approximately 74% compared to almost 52% in 2010.
The projections also show that within TDFs, OTS active accounts will have the most revenue growth. Bauer explains that there are a number of questions plans sponsors have to ask in choosing a plan.
"They look at them as simpler, cheaper and the fiduciary responsibility is a lot less with passive strategies than with active strategies," because there is a regulatory uncertainty in providing defined contribution plans, he says. "There are a number of sponsors who would like to be able to do that, but without clear regulatory certainty in providing retirement income, we're a ways off. The Department of Labor would have to clarify the requirements under which a plan sponsor could provide retirement income under defined contribution plans under a safe harbor so they're not carrying a liability for the rest of someone’s lifetime," Bauer adds.
Whether or not that liability will ease, target-date funds are on the rise. Assets in TDFs totaled approximately $550 billion, or 12.5% of the overall $4.4 trillion US defined contribution market in 2010. By 2020, TDFs will contain approximately $3.7 trillion, or 48% of the overall total.
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