Oligopolies are never good for consumers because they block new entrants and stifle innovation. Such is the case with target date funds (TDFs). 70% of the $3.5 trillion TDF industry is managed by just 3 firms—Vanguard, Fidelity and T. Rowe Price. That’s an oligopoly.
Plan sponsors have been limited to one-size-fits-all TDFs provided by a few dominant asset managers who like things just the way they are now. Only a few fiduciaries have dared to stray from the oligarchs, overcoming the fear of losing the protection of procedural prudence—doing what other fiduciaries do.
Most fiduciaries are unaware of the ongoing metamorphosis that is transforming 401(k) investing and providing substantive prudence—doing what is best for beneficiaries. A few non-oligarchs provide the variety and richness of institutional investment options personalized to the specifications of plan participants. These services are not being utilized much, yet, because they’re a secret. Innovation is being quashed, but now that you know, tell everyone.
No, these are not custom TDFs—that’s yesterday’s gimmick. These innovations are much better than custom TDFs. They are personalized target date accounts (PTDAs)—the ultimate in customization—made possible by technological advancements.
In the following you’ll learn the secrets of this metamorphosis. You’ll discover some of the providers and learn how PTDAs benefit participants, including why some don’t.
Personalized target date account providers
The following table summarizes some of the PTDA providers.
You’ll recognize most of these providers. Some, like Target Date Solutions, may be unfamiliar to you but I founded it in 2006 and it has managed TDFs since 2008, longer than most. Now you know that secret.
These non-oligarchs are taking the lead in solving the one-size-fits-all problem in TDFs, a serious shortcoming acknowledged by everyone.
Interestingly, their approaches are all different. Some are designed solely for defaulted participants to serve as the Qualified Default Investment Alternative (QDIA). Others serve both defaulted and self-directed participants. The next section identifies the challenges and what can be reasonably achieved with PTDAs.
The best PTDA
The best PTDA has realistic objectives and protects against Sequence of Return Risk in the Risk Zone.
Some PTDAs attempt to make a risk decision for defaulted participants by using data on the recordkeeper platform. This is a mistake because that data tells you very little about the participant. Defaulted participants do not want to engage so their situation and risk preferences cannot be known.
The risk decision for the QDIA is best left to the plan sponsor. And the plan sponsor should be given a lot of flexibility in this decision. For example, the target date should be the actual date rather than a 5-year or 10-year cohort, and the risk decision should be customized as discussed below in the paragraph on glidepaths.
Self-directed participants do want to engage so they appreciate the ability to personalize. About a third of the $3.5 trillion in TDFs is from non-defaulted participants. These participants choose their risk and their target date, and they can change these at will.
The glidepaths provided by the PTDA are the most important consideration. At least one of these paths should defend against Sequence of Return Risk, something that most TDFs don’t do. Ideally, three glidepaths—low, middle and high risk—are provided and participants can blend these.
Plan sponsors choose the glidepath, or blend of glidepaths, and the target date for defaulted participants, as the plan’s QDIA.
Conclusion
“Save and protect” is the mantra for retirement with dignity. We need to save enough and protect our lifetime savings as we approach retirement. The journey is complicated and ill-served by one-size-fits-all. Personalization is not just a nicety. It’s a necessity.
SEE ALSO:
• Custom Target Date Funds Need Personalization
Ron Surz is CEO of Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), and author of the book "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates baby boomers on the risks and rewards in contemporary investing, and Ron’s book is a tour of these shows. He can be reached at Ron@TargetDateSolutions.com.