Service providers are betting that billions of dollars will pour into commingled target-date strategies over the next year.
In light of the Pension Protection Act of 2006, several 401(k) providers predict more defined contribution plans will add commingled target-date funds as a qualified default investment alternative for automatically enrolled participants.
No statistics on the amount of money in commingled target-date funds were available. But according to the Investment Co. Institute, Washington, investors put $114 billion into all types of target-date funds in 2006, up from $71 billion in 2005 and $44 billion in 2004. Commingled target-date funds will continue to grow alongside target-date mutual funds, observers say.
Commingled target-date funds are attractive to plan executives because of flexibility in choosing the firms that manage the money as opposed to an off-the-shelf mutual fund and the ability to negotiate lower fees.
With commingled structures, plan executives can replace poor-performing managers within the fund. On the flip side, if a plan executive is unhappy with a target-date mutual fund, he or she must replace the entire series of funds.
The PPA and the subsequent QDIAs approved by the Department of Labor in October include target-date strategies.
T. Rowe Price Retirement Plan Services, Baltimore, the third largest defined contribution provider, is entering the fray early next year with a commingled target-date product. Jerome Clark, portfolio manager at T. Rowe Price, said firm officials have considered a commingled version of its target-date funds for a couple of years and the time is right to launch the funds.
Were seeing demand for this type of product. I do think the PPA has had something to do with it. Plans want to have an appropriate default option and they demand flexibility, said Mr. Clark.
MG Trust Co., Denver, a subsidiary of Matrix Settlement and Clearance Services, launched eight target-date commingled funds last month.cq November
Now, with the new regulations in place and plan sponsors scrambling to meet the QDIA Dec. 24 effective date, target-date funds will only continue to increase in popularity, said Cliff DAmato, chief executive officer at Matrix.
More plans have been adding commingled funds as core investment options. The $9 billion 401(k) plan of Time Warner Inc., New York, and the $4.4 billion 401(k) plan sponsored by International Paper Co., Stamford, Conn., are among plans that offer core commingled options to their 401(k) participants.
Service providers believe commingled target-date strategies are about to take off as well. Executives at Schwab Corporate & Retirement Services Inc., San Francisco, which offers commingled target-date funds to DC plans, are seeing more interest among clients.
These funds have open architecture, which is especially attractive to large plans, said Clare Berquist, director of 401(k) strategies at Schwab. They want that flexibility. After the PPA passed, more sponsors have been looking at changing to commingled as a QDIA. They could negotiate cheaper fees.
According to Morningstar Inc., Chicago, the average expense ratio for a target-date mutual fund is 0.73%, vs. 0.6% for a commingled version.
Chris Cumming, senior vice president at Great-West Retirement Services, Denver, said customized commingled target-date options are taking it to the next level.
Taking another look
Plans could use their own funds and trust their consultant with the glide path and the fiduciary requirement becomes easier. These arent new options by any means, but plans are taking another look at them after the PPA, said Mr. Cumming.
Cynthia Hayes, managing director at Merrill Lynch Retirement Group, Pennington, N.J., said a number of Merrills clients have adopted these strategies and she only sees the number growing. Were seeing most of the clients that are in stable value funds shift to target-date for QDIA. For clients on the larger end of the market, commingled (funds) makes sense. The flexibility of these funds is very attractive, she said.
Schwab, Great-West and Merrill all have commingled target-date funds, but officials at the firms were unable to break out assets in commingled funds from those of other forms of target-date funds.
Pyramis Global Advisors, Boston, Fidelity Investments institutional arm, launched its target-date commingled funds in January. The strategy garnered $4 billion in nine months.
The $1 billion 401(k) plan of the Transport Workers Union of America, New York, recently added Pyramis commingled target-date funds as its default option. According to an official at Pyramis, TWU switched to nine Pyramis commingled target-date funds as default options from the Fidelity Institutional Money Market Fund. The changes take effect Jan. 2. Peter Copeland, manager at the union, didnt return calls seeking additional information.
The Commonwealth of Massachusetts Deferred Compensation Plan, Boston, also moved to commingled target-date funds in July. The $4 billion 457 plan features eight commingled options offered by AllianceBernstein Inc., New York.