More sponsors of the largest 401(k) plans are opting to not usetheir recordkeeper's proprietary target-datefunds, according to data from SEI Investments Co., aninvestment manager with $684 billion in assets underadministration.

More than two-thirds of plan sponsors with more than $1 billionin plan assets are using target-date funds from a provider otherthan the plan's recordkeeper, according to a survey of 231 planswith assets between $25 million and $5 billion: 47 of those plansare SEI clients.

For all plan sizes surveyed by Oaks, Pa.-based SEI, which doesnot have a recordkeeping business, 46% are using a separate assetmanager's target-date funds.

Plans in the smallest size segment are most likely to use theirrecordkeeper's target-date funds. Among plans with less than $100million in assets, 68% use their recordkeepers' target-date funds;about half of midsize plans with $100 million to $300 million inassets use their recordkeeper's target-date funds; and 61% of largeplans with assets between $300 million and $1 billion are stillusing their recordkeeper's proprietary target-date funds.

Of all plan sponsors, 62% said it was a good idea to separateasset management services from recordkeeping. Among mega sponsors,38% said sponsors should not be offering their recordkeepers'target-date funds.

And while SEI's report said that was indicative of a “trend,”the vast majority of sponsors with assets under $1 billion that usetheir recordkeeper's target-date funds do not plan on making animmediate change: 87% said they had no intention to move tononproprietary target-date funds in the next year.

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Usage of target-datefunds

Despite the overall growth of target-date funds since passage ofthe Pension Protection Act in 2006, sponsors expressed concern thatplan participants are not using the funds.

As total target-date fund assets have surpassed the $760 billionmark, a number most industry analysts only see growing in the nearand intermediate future, SEI's study suggests that in recent years,growth has not been driven by more participants electing to usetarget-date funds. Rather, the report says investment performance,continued contributions from existing target-date fund users, andre-enrollment of plan assets into target-date funds accounts formuch of the funds' growth.

To support that theory, SEI uses data from the InvestmentCompany Institute, which shows that at the end of 2013, 41% of401(k) plan participants held at least some assets in target-datefunds.

SEI's survey supports that figure, as three-quarters of plansponsors said less than half of their plan participants wereinvested in target-date funds, suggesting to SEI's analysts thatorganic growth of target-date fund usage has been stagnant.

Only 5% of sponsors surveyed by SEI said three-quarters or moreof their participants were invested in target-date funds.

SEI's report says sponsors that use target-date funds fromproviders other than their recordkeeper, or build customtarget-date funds for their plans, are experiencing higher overallparticipation in the funds. Of the sponsors that offernonproprietary target-date funds, 10% had participation rates intarget-date funds above 75 percent; only 2% of sponsors offeringtheir recordkeepers' funds had participation rates that high.

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