Report: Target date funds expected to boom by 2018

Total assets in target date funds will grow to $2.6 trillion by 2018, attracting 80% of new and reallocated flows into defined-contribution plans for the next decade, according to a projection in a recent Casey Quirk & Associates LLC report.

Target date funds alone will represent close to half the projected $5.8 trillion total assets in DC plans in 2018, according to the report, “Target Date Retirement Funds: The New Defined Contribution Battleground.” Last year, such funds totaled $311 billion of the $3.1 trillion total in DC plans, the report said.

The rapid growth in target date funds “will transform” the competitive DC marketplace, encourage use of strategies and products adapted from those now used by defined benefit plans, and “rearrange winners and losers” among target date managers, the report said.

“Target date funds will grow large enough to not only change how asset managers approach the defined-contribution marketplace but also which managers will succeed at growing their 401(k) businesses,” David J. Bauer, a partner with Casey Quirk and a co-author of the report, said in a statement. “Today’s target date vendors — record keepers and active mutual fund vendors — will face powerful competition from indexers, specialty boutiques offering real assets and multiproduct fund managers with retirement income solutions.”

Benjamin F. Phillips, a partner at Casey Quirk, and Justin R. White, a senior associate, are the report’s other co-authors.

The report said that target date funds will become the primary source of opportunities for investment-only managers, “generating nearly $13 billion in annual revenue,” compared with about $2 billion now.

The report classifies as investment-only firms those that are without their own record-keeping platform or those that have one but provide investment products only to plans using another record keeper.

Customized target date funds will grow to nearly $1 trillion in 2018, up from $53 billion today, the report said.

“More than 80% of off-the-shelf target date products will be passively managed by 2018,” compared with 37% now, the report added.

For record-keeper-affiliated target date fund managers, their bundled options risk shrinking to 25% of all target date vehicles, from 44%, by 2018 unless they step up aggressively against the new competition, including offering their own customized products, the report said.

The report’s conclusions reflect analyses of target date product data and interviews with more than 30 experts in the DC marketplace, as well as a survey of more than 400 U.S. DC-plan executives in March, conducted jointly with the Profit Sharing/401k Council of America.

Casey Quirk provides consulting services exclusively to investment management firms.

Barry B. Burr is on the staff of sister publication Pensions & Investments.