More sponsors of the largest 401(k) plans are opting to not use their recordkeeper's proprietary target-date funds, according to data from SEI Investments Co., an investment manager with $684 billion in assets under administration.

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

For all plan sizes surveyed by Oaks, Pa.-based SEI, which does not have a recordkeeping business, 46% are using a separate asset manager's target-date funds.

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

Of all plan sponsors, 62% said it was a good idea to separate asset 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 use their recordkeeper's target-date funds do not plan on making an immediate change: 87% said they had no intention to move to nonproprietary target-date funds in the next year.

Usage of target-date funds

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

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

To support that theory, SEI uses data from the Investment Company Institute, which shows that at the end of 2013, 41% of 401(k) plan participants held at least some assets in target-date funds.

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

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

SEI's report says sponsors that use target-date funds from providers other than their recordkeeper, or build custom target-date funds for their plans, are experiencing higher overall participation in the funds. Of the sponsors that offer nonproprietary target-date funds, 10% had participation rates in target-date funds above 75 percent; only 2% of sponsors offering their recordkeepers' funds had participation rates that high.

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Sponsors of Largest 401(k)s Separate Asset Management, Recordkeeping

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