TDFs still the darling of DC plans, but could guaranteed income options make inroads?
NEPC said it expects guaranteed income solutions and ESG investments to make progress, albeit slowly, in response to regulatory developments.
Nearly all defined contribution (DC) plans use target funds as their default investment option, and about 44 percent of plan assets were invested in TDFs in 2021, up from 28 percent in 2011. This is according to the latest version of NEP’s annual Defined Contribution Plan Trends and Fee Survey.
NEPC, an independent, research-driven investment consulting firm, studies DC funds each year, including plan investment trends, features, and innovations across major sectors, and how these plans have evolved over the years. The 2021 survey studied 137 DC plans with $230 billion in aggregate assets and 1.6 million participants. About two-thirds of the plans studied were corporate plans, while one-fourth were health care plans and 8 percent were not-for-profit plans. The average plan had $1.7 billion in assets and 12,200 participants.
The report found that retirement wealth has experienced a significant increase during the past year, with median plan assets growing 67 percent to $728 million during the past 5 years. This growth could create opportunities for fiduciaries to diversify with custom solutions, separate accounts and collective trusts, the report said. During 2022, NEPC said it expects guaranteed income solutions and ESG investments to make progress, albeit slowly, in response to regulatory developments.
“Because the Great Resignation placed immense stress on the retirement ecosystem, flexible features and purpose-driven investment options are now deal-breakers and deal-makers,” said Bill Ryan, partner and NEPC’s Head of Defined Contribution (DC) Solutions. “This survey helps illustrate how plan sponsors are looking for consultation beyond simple ESG negative screening and TDF ‘best practices.’”
Investment menus are moving toward index funds, the report found. Thirty-eight percent of plans offer index TDFs, and 70 percent of plans offer a tier of three or more index funds in their core menu. About 15 percent of plan assets are invested in core menu index funds, said NEPC. Within TDFs, blend TDFs and index TDFs both grew slightly in popularity from 2016 to 2021, while active TDFs decreased in popularity, the study found.
“The significant uptake of target-date funds is helping to transform the market in meaningful ways,” said Ryan. “Investment managers are now evolving their TDF offerings to include payout features or spending guidance.”
More than two-thirds of plans offered between 10 and 14 core investments, 16 percent offered between 4 and 9 core investments, and 15 percent offered more than 14 investment options. Options with both active and passive elements, such as intermediate-term bonds and equity funds were found in most plans, while inflation-sensitive options like Treasury Inflation-Protected Securities (TIPS) and Real Estate Investment Trusts (REITS) were available in 39 percent of plans.
When looking at the savings phase of DC plans it studied, NEPC found 97 percent offer TDFs, 38 percent offer managed accounts, and 38 percent offer target risk or balanced funds. Sixty-three percent of plans offer self-directed brokerage, up from 60 percent year over year.
Looking at investments from the spending phase, 99 percent offer a capital preservation option, 88 percent offer installment payments, 2 percent offer a managed payout fund and 1 percent offer guaranteed income options. About half of plan recordkeepers have an out-of-plan annuity marketplace available, said the report.
NEPC said the growing reliance on TDFs could minimize the importance of the core menu in DC plans, and simplifying the number of choices could be a key to success for participants. For example, 66 percent of plans offer Stable Value while 53 percent offer Money Market options. Plans that offer both might consider simplifying to offering only the preferred stable value option.
The study also found increasing interest in custom funds that may offer better risk management, to comply with broadening mandates, or introducing new asset classes as fixed operational costs become less of a burden. White label funds are most prevalent in plans with more than $5 billion in assets.
Meanwhile, adoption of managed accounts has remained flat for the past three years, the report found, despite a strong push by recordkeepers. More clients are considering moving away from managed accounts than adding them, said NEPC.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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