DC Specialists Embrace Custom TDFs

The number of DC specialist advisers making customized target-date fund recommendations has increased significantly in just the last year.

Defined contribution (DC) specialist financial advisers managing at least $50 million in DC assets show an increasing inclination towards use of custom target-date funds (TDFs), according to a new analysis published by Cogent Reports.

The analysis shows roughly 15% of advisers in this market segment are recommending some type of customized TDF product for at least some clients. While 38% in this segment still recommend proprietary fund offerings from the plan provider and 46% recommend TDFs provided by external third-party managers, Cogent Reports suggests this is a clear sign of market evolution toward greater use of customization.

According to Cogent Reports, the growing number of advisers who advocate for using an external manager for target-date funds rather than the proprietary offering from the current plan recordkeeper is “further evidence that incumbent recordkeepers must continue to up their game in this increasingly competitive marketplace.”

At the individual brand level, DC specialists are equally likely to tap American Funds and Vanguard as their target-date fund provider, while American Funds enjoys a stronger advantage across all other DC AUM segments,” the analysis observes. “Emerging DC advisers—financial advisers managing under $10 million in DC assets—also gravitate to Vanguard, Fidelity, T. Rowe and BlackRock when recommending target-date fund providers to clients.”

Looking across all DC advisory market segments, proprietary TDF offerings established by the plan provider are recommended by 48% of advisers, while TDFs offered by an external asset manager are recommended by 42% of advisers. Much of the remainder, or about 8%, commonly recommends customized TDFs.

Important to note, with or without customization, clients’ and advisers’ consideration of target-date fund providers remains largely based on fees and long-term performance. There are also considerations about the peripheral risks of offering a custom fund—as a growing handful of employers/plan sponsors have already been sued over the performance of customized funds.

“Full-service plan providers and DC investment managers must understand the specific nuances by plan adviser producer and channel to retain and win business,” the analysis concludes.

Additional data and analysis is available here