With the latest introduction from their T. Rowe Price “Custom” target date ranges.joining American Funds and Pimco, it's worth reflecting on the evolution of TDFs from their humble beginnings created by Donald Luskin and Larry Tint at Wells Fargo Investment Advisors in the 1990s, which were acquired by Barclays and then Blackrock.
Not only do TDFs illustrate the evolution of the DC industry and can be the vehicle for dramatically improved results, they also provide valuable lessons that can lead to 401(k) 3.0 with the automatic plan as 401(k) 2.0.
The spectacular growth of TDFs, estimated to be $3.5 trillion in 2023 by Morningstar with 38% of 401(k) assets according to EBRI collecting 68% of new contributionsit didn't start until Pension Protection in 2006, which provided a safe harbor for using automatic features with TDF by default.
The lesson here is that products don't move markets – they're just tools waiting to be used. Without agent like automated features, TDFs would be just another investment choice, even though they make so much sense for investors who are unable or unwilling to create and manage their own portfolios.
With the growing use of TDFs and increased adoption of auto-enrollment and escalation required for new plans in 2025 and many state mandates with internals predicting that SECURE 3.0 may require it for all plans, TDFs can be the means of adopting retirement income as people. approaching retirement. They can also bring alternatives like private equity to the masses just as mutual funds democratized investing in public companies.
Having a high TDF is one of the three attributes for DCIOs to be successful along with indexing and being a key record keeper. TDFs also enable registrants who do not have a strong asset management complex to co-create TDFs by including, for example, proprietary investments as stable value. A major TDF provider can stay in the data storage business even though they don't have scale because they are worried about exits if they sell.
Lessons learned? While the tools are important and the logic dictates what people should do, it takes an impetus like auto-enrollment to understand human behavior to make a dramatic impact. TDFs are a tool, and BeFi is the agent or actor.
In his recently published book, NEXUS: A Brief History of Information Networks from the Stone Age to AIYuval Harari describes why AI will dramatically impact our lives because it is an agent, not a tool, and can act on its own, which is both exciting and scary. Data and information are tools, as are many wellness applications, just like TDFs. But powered by AI, data can not only make people take action, he can act on his own, leaving them the option of opting out, which we know they rarely do.
So while I could jet about the evolution of TDFs and the many different flavors of “to versus through,” hybrid funds, multi-managers, and CITs add more fodder to the 401 echo chamber. (k), it might be better to open up, go back and understand the existential lessons learned about why TDFs have gained popularity so quickly and why they are so important for the future.
The next questions the DC and even wealth industries need to ask are:
- How do we engage participants?
- How can we unleash the power of data + behavior?
- How can we provide advice at scale to the masses?
While the convergence of wealth, retirement and benefits at work is a hot topic and will be a major point of discussion at the Wealth@Work and RPA Roundtable this week in San Antonio, most are still struggling to effectively answer these questions.
Anyone who can do this will experience rewards even greater than the leading TDF providers and dominate the DC consolidation industry, leaving the outside behind.