Defined contribution assets invested in target-date strategies climbed nearly 29% to $96.5 billion in the 12 months ended Sept. 30, according to the Pensions & Investments' annual survey of the largest retirement plans.
Defined contribution and target-fund experts say the growth should continue, fueled in part by more plans offering the funds but more significantly because of plan design features that encourage greater target-date fund investing — such as qualified default investment alternatives, auto-enrollment and re-enrollment.
“The growth looks sustainable,” said Kevin Chisholm, associate director of Cerulli Associates in Boston.
“We will see more cannibalization of other asset classes (in DC plans) as people get more comfortable with target-date funds and sponsors provide more education and communication,” said Brooks Herman, director of research at BrightScope Inc., San Diego. Core bond funds and domestic equity funds are the most vulnerable, he said.
Target-date funds are taking a bigger piece of plans' average asset allocations, according to P&I survey data. In the latest survey, target-date funds represented 11.6% of aggregate assets among the DC plans among the top 200 overall vs. 9.6% for the year-earlier survey.
Among the largest corporate DC plans, target-date funds accounted for an average allocation of 10.9% within the asset mix vs. 9.5% in the previous survey.
Among the largest public DC plans, the average asset mix for target-date funds was 10.4% vs. 5.4%. The huge jump is explained in part by a boost in the target date allocation of the Washington State Investment Board, Olympia. The board, which ranked third among public DC funds with $11.53 billion, reported 22% of assets in target-date funds as of Sept. 30, up from 8% a year earlier.
Of the 60 plans identifying their qualified default investment alternative in the latest survey, 49 cited target-date funds, nine referenced balanced funds and two mentioned managed accounts. In the previous survey, 38 of 48 plans cited target-date funds as QDIA, while eight cited balanced funds and two cited managed accounts.
“Our research shows target-date funds are the most popular QDIA,” said Winfield Evens, a partner at Aon Hewitt, Lincolnshire, Ill. “We expect target-date funds will be a dominant — not just a large — component” of DC plan assets.
Target-date funds will gain market share vs. target-risk, or balanced funds, within DC plans “because they are a more elegant” asset allocation model, Mr. Evens said. “They offer good asset allocation for the average participant.”
He added target-date fund asset growth will be enhanced when more sponsors are comfortable integrating lifetime income options within the funds. “We still need greater clarity from government,” said Mr. Evens, referring to many plan executives hesitating to use lifetime income options without a definitive safe-harbor ruling by the Department of Labor.