Fundsters interested in the target date side of the mutual fund business may want to take a look at a new report from Financial Research Corporation (FRC). Today, in partnership with BrightScope, the Boston-based fund research firm released Trends in Target-Date Portfolios on Recordkeeper Platforms, looking at how 50,000 401(k) plans are using target-date funds. According to the report, some plan sponsors are picking and choosing with target date funds to use from a series instead of using the entire series.
"BrightScope data reveals that in one retirement plan, only five out of 12 funds in a target-date series were selected by the plan sponsor. When this trend plays out in the broader marketplace, it leads to varying asset levels across target-date categories," stated FRC's Lynette DeWitt, author of the report. "We've known already that a few fund categories hold the largest assets, and now we understand why. We anticipate that the less popular funds in a series will remain open to maturity now, but target-date series in the future will be comprised of fewer funds."
The partnership may not surprise many fundsters, as last year San Diego-based BrightScope (a data specialist that offers searchable databases of 401(k) plans and advisors) partnered with FRC-parent Mercatus on a new tool, Beacon, designed to help asset managers (i.e. defined contribution investment-only firms) track where their funds are being used inside of 401(k)s [see MFWire, 10/12/2010].
Company Press Release
Boston, MA, August 9, 2011 –New analysis of 401(k) recordkeeper platform data has uncovered that retirement plan sponsors are selecting only specific parts of a target-date fund series, even though asset managers market the entire target-date fund series. This is according to a new report, Trends in Target-Date Portfolios on Recordkeeper Platforms, released today by Financial Research Corporation (FRC). This in-depth report was made possible by through a partnership between FRC and BrightScope, the leading provider of retirement plan ratings. Based on the research findings, FRC sees this trend having broader implications for the target- date market, as it suggests that certain asset managers will face demand hurdles for their target-date funds that were previously unexpected.
This report is the industry’s first-ever examination of the adoption of target-date series on 401(k) platforms. In the report, FRC examines the asset composition of target-date funds in 50,000 401(k) plans, representing 90% of all 401(k) plan assets. FRC also assesses how recordkeepers and plan sponsors use target-date products, reviews product distribution trends, and delivers actionable recommendations for firms seeking to grow their target-date product lines. It also provides a unique and unseen glimpse into the composition of target-date products on investment menus. Analysis of how target-date funds are distributed by recordkeepers will assist industry observers and research consultants to better understand and assess the 401(k) platform segment. For manufacturers interested in positioning product on recordkeeper platforms, the insights in this report can help craft a targeted strategy.
“Target date funds have experienced explosive growth in recent years and continue to be a notable bright spot for the mutual fund industry,” said Mike Alfred, CEO and co-founder of BrightScope. “Asset managers who wish to move the needle in this space must have a holistic view in to the marketplace dynamics so they can capitalize on the significant distribution opportunities.”
The data gleaned from recordkeepers and plan sponsors, as reflected in BrightScope Beacon TM data, demonstrates that fund selection differs by recordkeeping platform and by retirement plan. This indicates that it is likely that plan sponsors are adopting only the funds that match the specific demographics of their participants. While this level of customization may be ideal for the plan, it raises questions about the future viability of larger target-date fund series.
“To illustrate this trend, BrightScope data reveals that in one retirement plan, only five out of 12 funds in a target-date series were selected by the plan sponsor. When this trend plays out in the broader marketplace, it leads to varying asset levels across target-date categories. As seen in FRC’s data, 70% of target-date mutual fund assets are held in the five most popular fund categories: 2020, 2030, 2025, 2015, and 2040,” stated Lynette DeWitt, author of the report. “We’ve known already that a few fund categories hold the largest assets, and now we understand why. We anticipate that the less popular funds in a series will remain open to maturity now, but target-date series in the future will be comprised of fewer funds.”
For more information or to schedule a call with Ms. Lynette DeWitt, please contact Jim Tylenda via e-mail at jim.tylenda@frcnet.com. We regret the full report is for purchase only. To inquire about obtaining the report, contact FRC sales department at 866-532-8009.
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About BrightScope
BrightScope (www.brightscope.com) is a financial information company that brings transparency to opaque markets through independent research and analysis. Delivered through web-based software, BrightScope data drives better decision-making for individual investors, corporate plan sponsors, asset managers, broker-dealers, and financial advisors. The BrightScope RatingTM, developed in partnership with leading independent 401k fiduciaries, reviews more than 200 unique data inputs per plan and calculates a single numerical score which defines plan quality at the company level.
About Financial Research Corporation
For more than 20 years, Financial Research Corporation has assisted marketing, product development, and strategic planning professionals in the creation of innovative products and services. Based in Boston, FRC is at the forefront of assisting the world’s leading asset managers and distributors to comprehend and respond to the rapid changes occurring in the manufacture and distribution of investment products. For more information, contact FRC at (866) 532-8009, frcinfo@frcnet.com or visit www.frcnet.com.
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