Target-date assets continue to climb

Target-date strategies continue to capture a growing portion of assets among the largest 1,000 U.S. retirement systems, Pensions & Investments' annual survey showed.

For the 12 months ended Sept. 30, target-date strategies accounted for 20.4% of the $3.7 trillion in defined contribution assets among the P&I 1,000, up from 18.4% in the year-earlier period and 16.8% in 2015.

Among defined contribution plans in the largest 200 systems, target-date assets accounted for 20% of the $2.2 trillion in total DC assets, up from 17.7% in 2016 and 16.2% in 2015.

"It's been a fairly persistent creep upward for target-date funds," said David O'Meara, senior investment consultant at Willis Towers Watson PLC in New York. Although target-date strategies do not make up the bulk of defined contribution assets currently, for many Willis Tower Watson clients, the investment option often captures 50% or more of new contributions, Mr. O'Meara said. One reason is because the vast majority of participants are automatically enrolled into target-date strategies as the qualified default investment alternative, Mr. O'Meara said. The opt-out rate for auto-enrollment programs is typically less than 10%, he noted.

Auto-escalation programs and re-enrollment of participants into default target-date options also have driven up the amount of assets invested in these strategies.

Mr. O'Meara explained that "for the first couple of years, participants tend to let auto escalation do (its) thing" until contributions reach 8% or 10%. Participants may or may not increase their contribution rate from there, but you "don't really see people going back ... and lowering their contribution rate," he said.

"It's a game of inertia," said Russell Ivinjack, a senior partner at Aon Hewitt Investment Consulting in Chicago.

85% by 2021

By 2021, target-date strategies are predicted to capture 85% of participant contributions, said Holly Verdeyen, senior director of defined contribution investments for Russell Investments in Chicago, citing data from Cerulli Associates' 2016 U.S. Defined Contribution Distribution report. By 2020, target-date strategies are predicted to become the largest option, by assets, in DC plans, she added.

"Absent a change in the defined contribution marketplace, we're expecting target-date funds to become the lion's share of assets in defined contribution," plans, Mr. O'Meara said.

Factors that could curtail that growth could be regulatory changes or a solution to helping participants draw down assets in retirement, he said.

The industry still hasn't figured out a great way to help participants manage their withdrawals in retirement, Mr. O'Meara said.

"Target-date funds may or may not be the right fit," he said.

Custom target-date strategies continue to snag the lion's share of target-date assets among the largest plans.

Plans in the top 200 reported $185.1 billion in custom target-date strategies as of Sept. 30, up 19.8% from a year earlier. This compares to $44 billion that was invested in off-the-shelf strategies as of Sept. 30, up 36.6% from 2016.

Driving the interest in custom target-date funds is the ability to tailor glidepaths to companies' workforce demographics, potentially improving participants' outcomes, Ms. Verdeyen said.

Jumbo plans that have the scale and expertise are implementing custom target-date strategies, Mr. O'Meara said.

In DC asset allocation, domestic equity continues to have the largest allocation, despite target-date strategies' rapid growth.

As of Sept. 30, DC plans in the top 200 had an aggregate domestic equity allocation of 41.6%, up from 40.4% in 2016.

"With equities continuing to rally and bonds generating meager returns, it's no surprise that DC balances are even more equity-centric today," Mr. O'Meara said. "The dominance of U.S. equity and cash (an aggregate 14.7% as of Sept. 30) illustrate that either the tools for diversification are not available to many participants or participants don't know how to use them. I am concerned participants will be ill prepared for the next recession, which we believe is slightly more likely than not to occur within the next five years."

Fixed-income allocations among DC plans in the top 200 declined to 5.5% as of Sept. 30, down from 6.7% in 2016.

Stable value allocations, meanwhile, fell to 6.8% from 8.8%.

Part of the stable value decrease can be attributed to some large plan sponsors that reported significant stable value allocations in 2016 not providing that data in the most recent survey. Even so, 94% of DC plans in the top 200 that reported stable value allocations in both surveys reported a smaller allocation in 2017.

With stable value only returning about 2% a year and other asset classes surpassing that, some participants might have moved on from stable value, Mr. O'Meara said.

Also, stable value often was the default investment option before the Pension Protection Act of 2006, Mr. O'Meara said.

Participants who were defaulted into that option are getting older and might be leaving the plan or revising their allocations, he said. The PPA authorized the use of target-date strategies as a qualified default investment alternative.

Mr. Ivinjack pointed to the growth of target-date funds and strong equity performance during the survey period as potential reasons for stable value's decline.

While the survey showed a decline in stable value as a percentage of plan assets, Mr. Ivinjack said the amount of dollars invested in stable value does not appear to be changing all that much.

Auto features drive inflows

Auto features are driving DC inflows and the growth of DC plans, Russell's Ms. Verdeyen said. Strong market performance over the year has also given assets a boost, she said.

Among the top 200, 80% of DC plans that provided employer and employee contributions in both 2016 and 2017 reported increased overall contributions in 2017.

About 84% reported increased employer contributions and 76% reported increased employee contributions.

The current survey also found rising allocations to collective investment trusts. For most DC plans in the top 200 that reported assets in CITs in both 2016 and 2017, the percentage of assets invested in CITs rose or was maintained in 2017.