Newsroom

Assets in defined contribution plans keep growing, but so does the scramble for relevant investment solutions as plan sponsors remain focused on low fees.

. . .

Bill Ryan, a partner in and the defined contribution team leader at NEPC LLC, agrees that the firm is continuing to see “heavy cash flow” into target-date funds for all ages—including those older than 65 who are keeping their investments in-plan for longer.

“We’re going to continue to see target-date funds take market share away from the core lineup in the next 12 to 18 months,” Ryan says.

The makeup of TDFs is not sitting still, he notes. Some providers are creating more aggressive glide paths for investors younger than 65 so they do not fear losing out on growth.

. . .

Meanwhile, NEPC’s Ryan says, his team has been interested to see some of the largest passive fund managers coming to market with competitively priced active funds. He believes these offerings will pull money away from the traditional active managers to those large passive fund managers to the tune of some $8 billion in the next 18 months. While that may be small compared to the $3 trillion in actively managed funds, it could seriously shift the market for active funds over the long term.

“I think with the passive providers being able to offer more moderate to aggressive off-the-shelf products, that puts a lot of pressure on the active managers in the space, as, historically, they were the only ones out there [with such offerings],” he says. “If you like a higher-risk posture but at a low-cost entry point, you now have a choice.”

The challenge for active managers working with large caps, Ryan notes, is the dominance of the Magnificent 7 tech stocks of late, because active managers may have restrictions on what percent of investments can be held in a single or group of stocks. Even if that is only causing relatively short-term underperformance, it could trigger plan fiduciary monitoring for the funds to be reviewed or replaced.

. . .

But Ryan of NEPC notes that recent 401(k) litigation has resulted in “unfortunate press” that may crimp managed account uptake. Ryan notes recent complaints responding to managed account use by providers TIAA and Morningstar and engineering and construction company plan sponsor Brechtel.

The strain has been taking its toll on clients, he says, with a handful of NEPC clients “voting to terminate managed accounts” from their plans, representing “in the neighborhood of $3 billion.”

Ryan, whose NEPC has, in the past, been critical of the fees charged for managed accounts, says there will likely be further pullback from offering the personalized savings vehicles to investors, in part because of further litigation that may drop.

. . .

Finally, Ryan of NEPC notes that in the next six to 18 months, “we are going to be in a very different interest rate environment,” with the Federal Reserve likely to move rates lower.

NEPC predicts that new market environment will bring back interest in stable value funds, which had been displaced by safer investments, such as money market funds, that could guarantee strong returns on the back of high interest rates. As rates fall, stable value “is going to pop,” Ryan forecasts.

“Stable value has a structural advantage and likely has weathered the storm of higher interest rates,” he says.