It’s hard to imagine any other product innovation coming close to claiming that impact. By 2015, TDFs accounted for 20 percent of all assets in 401(k) plans, according to the Investment Company Institute.

That level of explosive growth has asset managers like SSgA understandably chomping at the bit to put newer, lower-cost options in front of plan sponsors in the effort to retain and capture more of a market that shows no signs of slowing.

While SSgA has been managing defined contribution assets for nearly four decades, it has only been in the TDF market for about seven years. It’s the second largest DCIO firm with $420 billion managed globally—the firm does not have a record-keeping arm.

To date, SSgA has been able to grow in the TDF market by leveraging its internal management core competency with the larger trend of lower cost, passively managed investment options.

According to Morningstar, SSgA’s asset weighted average expense ratio for the State Street Target Retirement series was 13 basis points in 2016, down from 19 basis points the previous year.

That aggressive price point put the firm’s line among the least expensive: Vanguard’s passive series held an average expense ration of 13 basis points; Fidelity offers a passive series at an average of 12 points; and Charles Schwab rolled out a new index series last year at only 8 basis points.

SSgA’s large-cap equity index fund, built into its TDF series, cost investors only 3 basis points, according to Morningstar. Schwab’s large-cap fund is as cheap. But other managers' passive large cap funds are not. Despite what Morningstar calls “near identical objectives,” some managers charge as much as 35 basis points for indexed large cap underlying funds.

Shifting the focus to plan advisor specialists

In 2016, State Street saw nearly $1 billion flow into its target-date series. Throughout all of its investment products, the firm saw $2.6 billion of inflows. That means TDFs accounted for 38 percent of SSgA’s new assets.

Overall, the firm’s share of the TDF market is slim—only 0.1 percent, compared to Vanguard, Fidelity, and T.Rowe Price, which together account for 70 percent of the market.

But few can claim the explosive gains SSgA has captured of late. The $1 billion inflows in 2016 represented a 425 percent organic growth rate. Only Dimensional Fund Advisors grew at a faster clip—DFA saw a 1,520 percent increase in organic growth.

State Street’s Porteous says the firm is deploying a new, aggressive distribution strategy that is keying on plan advisor specialists to keep the momentum going.

“When we first launched our series, we went the traditional way, going directly to plan sponsors. We had some great success with that. But now we want to deliver through advisors in the intermediary market,” said Porteous.

In tapping what he says are the 2,400 plan advisor specialists throughout the country, Porteous says he thinks the firm can begin to better compete in what he calls the “smid” plan space—small to mid-sized plans.

Plans with $250 million in assets and less account for $2 trillion in total plan assets. Plan advisor specialists service $1 trillion of that, says Porteous.

“The trend of passive investing is moving to the small and midsized plan market,” said Porteous. “Historically, 85 percent of assets in the ‘smid’ space have been in actively managed TDFs. In larger plans, the split has been closer to 50-50.”

Smaller plans, whose sponsors are fiduciaries and exposed to the same liability as large plan sponsors, have become increasingly aware of fees on the investments they offer workers, says Porteous.

“We think it’s healthy to have both passive and active strategies,” said Porteous. “But smaller sponsors are insisting on greater levels of transparency.”

TDF 2.0

Powerful as TDFs have been in revolutionizing how 401(k) participants save for retirement, Porteous and other defined contribution experts think competitive forces are pushing evolution.

Such predictions have been made for years. Like a slow-turning aircraft carrier, the DC market has not quite yet set its new direction. When it does, Porteous expects the change will be considerable.

“TDFs have proven to be a fantastic accumulation tool for savers. But they don’t provide a drawdown strategy in retirement. Incorporating a decumulation tool will be the next evolution for the market,” said Porteous.

The question is when. Porteous says SSgA has a strategy in place to build decumulation strategies, like annuitizing portions of savings, in place, but he would not elaborate on specifics or commit to a rollout time line.

“To do it the right way is difficult,” he said. “You could just default everyone into an immediate annuity. But when you are trying to account for lower costs while guaranteeing income, and include the portability of assets when savers change jobs, all the while giving sponsors the regulatory transparency they need to offer new income options—that’s a tough solution to get to.”

Ultimately, the role of regulators will be critical. “If you are going to include an income option in TDFs, they will need to fit into the QDIA space to indemnify plan sponsors,” said Porteous.

Mass customization

Another evolution in TDFs is in the offing, thinks Porteous.

So-called mass customization would leverage financial technology to create a hybrid of traditional TDFs and managed accounts.

The knock on traditional TDFs is that they rely on limited input—age—to set a savings strategy.

Managed accounts of course go far beyond that and incorporate a wide data set on individual plan participants, and set and rebalance an investment strategy customized to risk tolerance levels. But they are expensive, and require a level of participant engagement that many say have prevented managed accounts from growing as a QDIA.

A mass customized TDF would account for information on participants’ total net worth, the state they live in, their married status, and spouses’ income, along with risk tolerance levels, to create a more individualized glide path.

Porteous says there is buzz around the concept among recordkeepers, asset managers and plan sponsors. He expects to see movement in the next five years.

But a mass customized TDF is likely to face the same obstacles that have slowed adoption of managed accounts.

“Participants would have to be an active part of this—they’d have to log into their accounts and provide all of this data. Today, that doesn’t happen all too often,” he said.

Then there is question of price. Any degree of advanced customization, even if done on a mass level, will come at a cost. The question is whether participants would be willing to pay for it.

“If they see an off-the-shelf TDF option, and then look at a mass customization option that costs more, participants will look at that and ask if it is worth it,” he added.