Customized target-date fund assets surged 40% last year as more defined contribution plans offered the investment option and more participants became comfortable with it, according to the latest annual survey of DC consultants by Pacific Investment Management Co. LLC.
The consultants reported that $195 billion was invested in custom target-date funds among client plans last year, compared with $139 billion in 2014, said a PIMCO report on the survey to be released April 4. Clients offering a custom target-date fund more than doubled in 2015, growing to 449 from 203 in 2014. Fifty-two percent of consultants said at least one client offered this option last year.
“It's growing because plans continue to look for control over their glidepath and their lineup,” said Stacy Schaus, executive vice president and defined contribution practice leader for the Newport Beach, Calif., money manager.
The survey is based on responses from 66 consulting firms that serve more than 11,000 clients with aggregate DC assets exceeding $4.2 trillion.
Customized target-risk/balanced funds also gained popularity, albeit on a smaller scale. Total assets for this strategy rose to $39 billion from $36 billion, and the number of clients using this approach climbed to 757 from 324. Thirty-eight percent of consultants reported having at least one client using a custom target-risk/balanced fund.
Any type of target-date fund is the preferred choice of consultants as a qualified default investment alternative, the survey report said. Eighty-nine percent of consultants in 2015 said they “generally recommend” target-date funds as a QDIA vs. 96% in 2014. Eight percent “generally recommend” a target-risk/balanced fund as QDIA last year vs. 2% in 2014.“Some of the biggest plans have both target-date funds and target-risk funds,” said Ms. Schaus.
The PIMCO survey indicated that consultants can influence clients' choosing a custom target-date strategy or a “semicustom” strategy — a target-date series that offers a record keeper's glidepath, incorporating a DC plan's core menu in the series. Twenty-eight percent of consultants said they actively promote a custom or semi-custom approach, while 56% said they “support client interest” in these strategies. Only 5% discourage such target-date funds, while 11% said they are neutral.
A majority of consultants said they believed the largest DC plans are the most likely to offer a custom target-date fund. Fifty-seven percent said plans with $1 billion or more in assets are the top candidates, while 13% said the biggest plans would be drawn to the semicustom strategy.
For plans with assets between $500 million and $1 billion, 29% of consultants cited the custom target-date funds as the top choice while 21% predicted plans would choose the semicustom approach.
Consultants also said DC plan executives' desire for greater control — and flexibility — contributed to the rising use of white-label funds. Last year, white-label funds accounted for $333 billion in client plan assets, up 65% from $202 billion in 2014, the PIMCO report said.
The number of clients offering at least one white-label fund climbed to 217 from 115, the report said. Thirty-five percent of consultants had at least one white-label client.
“White label is often synonymous with multimanagers, but it doesn't have to be,” Ms. Schaus explained. Using this approach can enable plan executives to simplify communications to participants, reduce participants' reliance on brand names, and allow plans to add and replace managers more easily, she said.
The survey also noted the most important factor in driving DC plan decision-making was meeting a participant's retirement goals. At 34%, the retirement goal was well ahead of litigation risk, which placed second among consultants (20%) as the most important issue.
“We were happy to see litigation risk was down on the list,” said Ms. Schaus. In 2014, PIMCO reported that 34% of consultants cited litigation risk as the most important factor in decision-making, followed by meeting participants' retirement goals at 32%.
Among other survey findings:
• Twenty-one percent of consultants said clients actively seek to retain participants' in their plans, while 30% prefer retaining those assets but don't actively encourage retention. That compares with 14% and 32%, respectively, in 2014.
• The median deferral rate for auto enrollment recommended by consultants was 6% of salary; the median annual rate for auto escalation was 1% of salary; and the median cap for auto features was 12%.
• Because of upcoming changes by the Securities and Exchange Commission in rules affecting non-government money market funds, 65% of consultants said they would “very likely” recommend clients switch to a stable value fund.
The online PIMCO survey incorporated data for the year ended Dec. 31. Sixty-six percent of consultants' clients were corporate plans; 20% were not-for-profit; 8% were public; 6% were multiemployer; and 1% was “other.”
