Total assets in target-date retirement funds will grow to $2.6 trillion by 2018, attracting 80% of new and reallocated flows into defined contribution plans for the next decade, according to a projection in a Casey, Quirk & Associates report.
Target-date funds alone then will represent close to half of the projected $5.8 trillion total assets in DC plans in 2018; in 2008, those funds totaled $311 billion of the $3.1 trillion total in DC plans, according to the report, “Target-Date Retirement Funds: The New Defined Contribution Battleground.”
The rapid growth in target-date retirement funds “will transform” the competitive DC marketplace, encourage use of strategies and products adapted from those now used by defined benefit plans and “rearrange winners and losers” among target-date managers, the report said.
“Target-date funds will grow large enough to not only change how asset managers approach the defined contribution marketplace, but also which managers will succeed at growing their 401(k) businesses,” David J. Bauer, Casey Quirk partner and a co-author of the report, said in a statement. “Today's target-date vendors — record keepers and active mutual fund vendors — will face powerful competition from indexers, specialty boutiques offering real assets, and multiproduct fund managers with retirement income solutions.”
Benjamin F. Phillips, partner, and Justin R. White, senior associate, are the report's other co-authors.
The report said target-date funds will become the primary source of opportunities for investment-only managers, “swelling to more than half the investment-only marketplace by 2018, up from slightly more than 10% today, and generating nearly $13 billion in annual revenues,” compared to about $2 billion currently.
The report classifies as investment-only firms those that are without their own record-keeping platform, or those that have record-keeping platforms but provide investment products only to plans using another record keeper.
Customized target-date funds will grow to nearly $1 trillion in 2018, up from $53 billion today, the report said. “More than 80% of off-the-shelf target-date products will be passively managed by 2018,” compared to 37% now, the report added.
For record keeper-affiliated target-date fund managers, their bundled options risk potential shrinking to 25% from 44% of all target-date vehicles by 2018, unless they step up aggressively against the new competition, including offering their own customized products, the report said.
The report's conclusions reflect analyses of target-date product data and interviews with more than 30 experts in the defined contribution marketplace, as well as a survey of more than 400 U.S. defined contribution plan executives in March, conducted jointly with the Profit Sharing/401k Council of America.
Casey Quirk consults exclusively to investment management firms.