Interest in hybrid active/passive TDF strategies on the rise: report

Fee compression is putting pressure on providers that are seeking to be more innovative in launching new target-date funds, prompting managers to consider more customization, according to new research by Cerulli Associates.

The fee compression challenge is bolstering certain trends among target-date managers, including blending passive and active strategies, as well as the push towards transitioning from TDFs to managed accounts later in a plan member’s investment journey.

Read: U.S. DC members continue to favour TDFs: report

Though active TDFs are still more prevalent than their passive counterparts, the margin is narrowing, at 12 per cent in 2018 compared to 18 per cent in 2017. The report also noted more TDFs are including both active and passive components, which is changing that dynamic.

“Assets invested in hybrid target-date funds are growing and nearly half of target-date managers surveyed believe that hybrid target-date products will gather meaningful defined contribution plan assets during the next one to three years,” said Daniel Uquillas, a senior analyst at Cerulli, in a press release.

It might be natural to assume the increased interest in hybrid TDFs is from plan sponsors that currently use active strategies and are seeking to include more passive methods to keep their fees lower. However, the report found there’s equal interest from plan sponsors looking to shift from purely passive to a hybrid and see an active component as a way to provide protection against market downside risk.

Read: Mixing TDFs, other assets in DC plans can ‘diminish’ benefit: report

The research also found target-date managers are eyeing managed accounts. Among survey respondents, close to half said the current TDF offerings aren’t customized enough for retired members or those nearing retirement. One way to address this, it suggested, is a transition away from a strict target-date investment strategy as members get closer to retirement to a managed account.

Half of target-date managers said they believe it’s highly likely a transition to managed accounts will be an attribute included in the creation of new TDF products, while 42 per cent said it was somewhat likely. Indeed, there are already target-date managers offering products that move the member out of a TDF model into a managed account as they age, the report noted.

“We recommend that target-date managers examine the potential demand for dynamic solutions, as many savers nearing retirement could benefit from customization,” said Uquillas.

Read: Do TDF’s glide paths still make sense in Canada’s retirement landscape?