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Cerulli: Target-date funds snagging larger share of 401(k) assets

Target-date funds will continue to grab more 401(k) assets, capturing 88% of new contributions to the plans and representing 34.6% of total 401(k) assets by the end of 2019, according to new research by Cerulli Associates.

At the end of 2013, target-funds accounted for 38% of new contributions to 401(k) plans and 13.5% of total 401(k) assets. Total target-date fund assets were $574.6 billion last year, and Cerulli forecasts target-fund assets would reach $2 trillion by the end of 2019.

“Target-date funds are a juggernaut,” said Jessica Sclafani, a senior analyst at Cerulli, in an interview. “It would be hard to stop them at this point.”

Ms. Sclafani said target-date fund growth has benefited from several factors such as dominance as a qualified default investment alternative and the growth of 401(k) plans using auto features that default participants into QDIAs if they don’t make active choices.

She said executives at 401(k) plans with assets of $250 million or more predict target-date funds could represent 50% to 75% of total plan assets within the next five years.

The target-date research is part of a Cerulli report, “Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans,” which will be issued to clients on Tuesday. Ms. Sclafani is the lead author of the report.

Ms. Sclafani said that as target-date funds grow, so will custom target-date funds, which now account for about 8% of assets in the target-date universe. She didn’t offer predictions or estimates on the growth of custom target-date funds.

Ms. Sclafani said custom funds are likely to become more popular for several reasons: DC plan executives believe the unique demographics of their participants are best served by a custom rather than off-the-shelf product; sponsors have more flexibility in hiring and firing managers; sponsors have better control over the glidepath of the target-date funds; and companies can harmonize the management of their DC plans with their DB plans.

Another potential prod to plans are suggestions issued by the Department of Labor in early 2013 recommending that DC plans review their target-date funds to determine whether open architecture and/or a custom strategy would be an improvement. The DOL comments weren’t presented as official rules or guidance, “but when the Department of Labor puts something in writing, sponsors and fiduciaries pay attention,” Ms. Sclafanisaid.