Target-date funds remain voracious

Target-date funds continue their march through the investment lineups of defined contribution plans, snapping up assets and raising allocation percentages in Pac-Man-like fashion.

Target-date funds offered by corporate sponsors grabbed 25.3% of the total asset allocations among 10 broad categories for the 12 months ended Sept. 30, 2019, up from 19.9% the year before, according to Pensions & Investments' annual survey of the largest retirement plans. Among public DC sponsors, the asset allocation percentage was flat at 21.6%.

The public and private company data reflects the DC components of the 200 largest U.S. retirement plans tracked by P&I.

Among these plans, aggregate off-the-shelf target-date fund assets committed to defined contribution rose 45.5% to $64.6 billion in the latest survey vs. $44.4 billion in the previous survey. Over five years, these assets grew by 139%.

In addition, custom target-date funds in DC plans advanced 19.5% to $238.7 billion in the current survey vs. $199.7 billion in the previous survey. Over five years, the custom assets advanced by 117.4%.

Target-date fund assets in DC plans grew faster than aggregate DC assets.

For the 200 largest retirement plans, the total DC component rose 4.6% to $2.58 trillion vs. $2.47 trillion in the previous survey. Over five years, total DC assets rose 44.4%.

The gains were similar for the DC component of the 1,000 largest retirement plans: up 4% to $4.26 trillion vs. the previous survey and up 41% over five years.

If a rising DC tide lifted all boats, target-date funds occupied the second-biggest boat for both corporate DC and public DC plans.

For DC assets in the 200 largest corporate retirement plans, domestic equity — excluding company stock — had the largest presence with 32% of assets vs. 34.6% in the previous survey. Company stock contributed 10.2% vs. 12.7%.

For public plans, domestic equity dominated with a 40.9% allocation vs 43% for the previous survey.

The plans with the largest amounts of DC assets are: Thrift Savings Plan, Washington, with $601 billion as of Sept. 30, up 3.8% from the previous year; AT&T Inc., Dallas, with $68.1 billion, up 4%; and The Boeing Co., Chicago, with $66.3 billion, up 3.6%.

As overall DC plan assets grow, much of the inflows are going to target-date funds thanks to auto features and target-date funds' dominance as a qualified default investment alternative.

"As people change jobs, they are more likely to be auto enrolled in a target-date fund than five years ago or 10 years ago," said Drew Carrington, senior vice president and head of the institutional defined contribution business at Franklin Templeton Investments, San Mateo, Calif.

"Many plans default people from day one" into QDIAs, of which target-date funds are overwhelmingly dominant, said Winfield Evens, Charlotte, N.C.-based vice president of investment solutions and strategy for Alight Solutions. "We expect the trend to continue."

Alight Solutions' 2019 annual report for its 401(k) index looked at aggregate contributions for 13 asset classes. Target-date funds accounted for 47%, dwarfing second-place large cap U.S. equity (20%) and third-place international equity (7%).

Among the asset classes, target-date funds placed first with 29.3% of account balances, followed by large-cap U.S. equity (26%) and stable value (9.5%). Target-date funds overtook large-cap equity as the leader in 2015.

The index tracks daily investment activity of more than 2 million 401(k) participants who have approximately $200 billion in retirement assets. The index covers employees of large-plan clients of Alight, but the company doesn't identify the number of plans.

The use of target-date funds "does skew toward younger participants," easily surpassing contributions to other asset categories among clients at Rocaton Investment Advisors, Norwalk, Conn., said Jeri Savage, principal and head of defined contribution research.

Because equity still plays a major role in plan menus and because fixed income offers diversification, Ms. Savage said clients offer a mixture of passive and active strategies for both equity and fixed income. "Our plans have passive building blocks," she said. "It's more obvious with equity. It's a cost issue."

Her firm also recommends that plans offer more fixed-income choices. "Active and passive fixed income each play a distinct role," she said.

Consultants said equity plays a strong role in public DC plans because participants in these plans also may be enrolled in a defined benefit plan. "If you have a DB plan, you can take on more risk," said Greg Ungerman, senior vice president and defined contribution practice leader for Callan LLC, San Francisco. "The pension is a big bond."