The Markets September 29, 2010

TDFs have Bright (yet Different) Future

Target-date funds are expected to capture $1.7 trillion worth of asset flows and account for 60% of all defined contribution assets and revenues by 2015, according to a new report.

Reported by

Fred Schneyer

However, consultant McKinsey & Company says in its report, “Winning in the Defined Contribution Market of 2015: New Realities Reshape the Competitive Landscape,” the target-date landscape of 2015 will look quite different than it does today. “The competitive dynamics in target driven solutions will undergo a revolution driven by plan sponsor demand, consultants and innovation,” McKinsey contends.

Driving much of the change will be due to fallout from a widespread perception that target-date funds “failed to deliver” during the economic downturn, the report says.

The result, according to McKinsey, are changes that are opening the way for innovations, ranging from fully customized, open-architecture solutions incorporating non-correlated asset classes or custom glide paths for large and mega-plans, to semi-customized multi-manager products, created from plan lineups, for mid-sized to large plans, to predominantly passive low-cost offerings for small plans.

Commented McKinsey: “This new wave of target-driven solutions creates a natural market entry point for new players, particularly for institutional asset managers experienced in customizing portfolios for institutional mandates.”

The next big area of opportunity, the consultant suggests, is figuring out how to effectively integrate a lifetime-income element to providers’ existing solutions. But that won’t be an easy road to travel with hurdles that include portability, credit risk and stability, cost, and most importantly, product complexity and participant education.

“Given current market inertia, a breakthrough in guaranteed-income solutions likely hinges on a few large-plan sponsors adopting them or meaningful regulatory intervention that alleviates concerns and dispels the wait-and-see attitude of plan sponsors,” McKinsey argues. “Innovators that overcome these barriers and create target-driven solutions (e.g. target-date, target-return, target-risk, target-income, target-inflation, guaranteed-income) can expect significant rewards in the years ahead.”