Target-Date Funds Poised for Growth

Cerulli Associates says asset managers will look toward more progressive approaches with target-date funds in the next year.

Market volatility has affected target-date funds this fall, but nonetheless, Cerulli says the products are well-positioned for future innovation. Established and new players in the target-date fund are “embroiled in a debate over the topic of the most suitable glidepath,’ according to the latest The Cerulli Edge—U.S. Asset Management Edition.

Within the ever-growing market for embedded advice products (balanced funds, asset allocation funds, lifestyle or risk-based funds, and lifecycle or target-date funds), target-date products continue to be on the rise. Almost $36 billion captured by embedded-advice products went to target-date programs through September, according to Cerulli.

Cerulli estimates that by the end of this year, assets in target-date funds will reach $185 billion and will grow to more than $1 million by 2013. The firm expects for the percentage of where those assets are to remain the same, with 67% of target-date assets in defined contribution plans and another 20% in individual retirement accounts (IRAs).

Portfolio Construction

Cerulli notes a trend the firm anticipates going forward: exchange-traded funds (ETFs) within target-date products. ETFs have already begun to creep up into target-date funds, with products such as the Fiserv Target-Date Blueprint Funds, which invest in Claymore ETFs, and a series of target-date funds that exclusively use ETFs. Cerulli data show that 65% of asset managers plan to use alternatives in target-date portfolio construction (and 12% already do).

The current generation of target-date funds is rooted in traditional asset allocation strategies. However, Cerulli expects many asset managers to take a more progressive approach in the next six to 12 months, but the firm also cautions asset managers about buying into trendy asset allocation strategies. Cerulli also mentions the rise of more customization in target-date funds, and says most surveyed asset managers anticipate a shift in the next two years to a more open model where investors will be able to access additional managers.

Meanwhile, the industry continues to debate the correct glidepath. As Cerulli puts it: “Where does the asset manager’s role begin and end to ensure that investors in their products end up with sufficient retirement savings?’