Defined contribution plans are sharply cutting back on target-date funds offered by record keepers and also expanding use of custom target-date funds, according to a survey by Callan Associates issued Thursday.
In an annual survey of DC plan executives, Callan found that 28.7% offered their record keeper's proprietary target-date fund series last year vs. 47.5% in 2013. In addition, Callan reported that the percentage of plans offering custom funds rose to 22.3% vs. 11.5% in 2013.
Several factors influenced the decline in using record keepers' target-date fund series, ranging from performance issues to changes in the glidepaths, Lori Lucas, the firm's Chicago-based executive vice president and defined contribution practice leader, said in an interview.
Another stimulus for plans' reviewing their target-date options was a February 2013 publication by the Department of Labor that included a tip that said plan executives should “inquire about whether a custom or non-proprietary target-date fund would be a better fit for your plan.” Although the DOL's tips were not a formal guidance, Ms. Lucas said this prompted plans to look at their target-date funds.
The custom target-date gain “was a surprisingly big increase,” she said.As target-date funds in general account for more total plan assets, their larger allocation within plans provides greater economies of scale for plan executives to consider offering custom funds, she said.
Two-thirds of plans with custom target-date funds had total assets exceeding $1 billion. The primary reasons for choosing a custom series was “the desire to have best-in-class underlying funds,” control of glidepath and “a better cost structure,” said a Callan report describing the survey results.
Callan's annual survey was conducted online in August and September among clients and non-clients. A majority of the 144 respondents are from 401(k) plans.
