Cogent Reports: Many Advisers Shop Around for TDFs

Retirement plan advisers are growing more selective in the target-date funds they recommend.

A new study finds that almost half of the advisers who sell defined contribution (DC) plans now “go shopping” for clients’ target-date funds (TDF), searching out the best fund for the best price—regardless of the provider or brand name.

“This is the first year we’ve seen plan advisers championing proprietary and non-proprietary options equally, which underscores how competitive the TDF market has become,” says Sonia Sharigian, senior product manager at Market Strategies and the annual report’s co-author.

The likelihood an adviser will suggest a TDF provided by a third party increases, too, in line with his assets under management (AUM). Nearly six in 10 (59%) defined contribution specialists managing $50 million or more in DC plan assets regularly urge plan sponsors to consider an external asset manager’s funds.

The trend toward such funds may not be surprising, the study reveals. According to Linda York, company vice president, the percentage has been edging up every year. “In 2013, just 32% [of advisers] recommended external target-date fund providers. In 2014, that number was 41%. Now, in 2015, it’s up to 47%,” she notes.

As to why, she posits “a variety of factors.” These include the greater scrutiny of plan fees and wider choice of target-date options. Also, “The fact that more plan providers are offering more open architecture in their fund offerings means more advisers have access to external managers,” she says.

NEXT: What lesser competitors stand to lose

Less competitive fund providers could stand to lose a growing amount of market share: Target-date funds now rank as advisers’ second favorite investment option, trailing only traditional, actively managed mutual funds, the paper says. Four in 10 DC advisers (41%) recommend a target-date or lifecycle fund as the plan’s default investment option—double those who suggest any other type of qualified default investment alternative (QDIA).

“The move toward external target date providers, along with [an] increasing popularity of index funds, shows that retirement plan advisers are acknowledging their clients’ concerns of managing plans more responsibly, including seeking the best overall value for the money,” says York. “Among the elite group of DC specialists [those managing $50 million or more in defined contribution assets] we find strong preference for both active and passive target-date fund providers, indicating that asset managers will not only need to compete on performance and price, but also find ways to further differentiate their target-date offerings in the marketplace.”

Among other findings:

● Nearly three-quarters (73%) of established DC advisers also recommend index funds to their clients, up from 64% in 2014.

● The percentage of advisers selling defined contribution plans is growing. Two-thirds (65%) of advisers report managing defined contribution assets as part of their overall book of business this year, up from 60% in 2014. “Established DC advisers who manage $10 million or more in DC AUM represent 27% of all advisers, up from 23% a year ago,” York says.

● Defined contribution advisers work with an average of 4.7 investment managers in their DC plans, down from 5.3 in 2014; however, they concentrate their business with just 2.7 plan recordkeepers—a number that has held steady for several years.

The report is based on a survey, performed in August, of 486 active advisers to defined contribution plans. Findings appear in Market Strategies International’s Cogent Report, “Retirement Plan Advisor Trends.” More information can be found here.