Target-Date Funds to Exceed $1T by 2012

Cerulli Associates estimates that target-date funds will grow to more than $1.1 trillion by 2012 from an estimated $277 billion at the end of 2008.

According to a press release, asset managers see investment consultants as the second target for target and lifecycle fund distribution, after plan sponsors.

Cerulli said target-date growth prospects have been bolstered by the Pension Protection Act (PPA) and the endorsement of auto-enrollment and auto-escalation. Target-date funds have been the most popular choice of the three qualified default investment alternatives approved by the Department of Labor, and Cerulli sees this trend continuing.

However, asset managers are not just sitting on their laurels waiting for the expected business growth. Firms are looking to improve on their current offering by adding customization, institutional vehicles including collective investment trusts (CITs), better asset allocation, and retirement income. When asked about expected enhancements likely over the next five years, 78% of DC providers surveyed in late 2007 pointed to retirement income demand, 72% forecasted demand for open-architecture, and 50% forecasted more customization within target-date funds, the press release said.

“While most target-date mutual funds are well accounted for, we see substantial growth coming from customized target-date funds, with either an institutional manager or an investment consulting firm providing asset allocation, or ‘glidepath’ construction, along with best-of-breed underlying managers,” said D.J. Lucey, senior analyst at Cerulli Associates, in the press release.

The report can be purchased here.