“We believe the future of DC will increasingly be defined by personalized investing, whereby the boundaries separating TDFs and managed accounts will fall away,” states the Executive Summary of a new white paper from global financial services firm Wilshire.
Discretionary Managed Accounts, despite superior personalization and open architecture design, the summary notes, have thus far failed to succeed target date funds (TDFs) as a QDIA solution. That’s attributed largely due to higher fees charged to defaulted participants who do not reliably engage to unlock the benefits of customization. But the white paper, “The Future of DC: Personalized Investing,” says that’s beginning to change.
“We believe these emerging innovations will amplify demand for and market share of managed account-powered solutions as retirement plans and their participants demand more personalized portfolio solutions.”
“We believe these emerging innovations will amplify demand for and market share of managed account-powered solutions as retirement plans and their participants demand more personalized portfolio solutions.”
Commenting on the white paper via LinkedIn, PGIM’s David Blanchett said he’s picking up what Wilshire is laying down.
“I think TDFs have been a fantastic strategy to help participants achieve better retirement/investing outcomes, but I think we’re getting to a place where effective technology solutions can offer personalization at lower fee levels that will make it increasingly attractive for DC participants/plan sponsors,” Blanchett wrote.
Wilshire believes the emerging ability to capture and integrate recordkeeper data at the individual participant level will power further improvements in portfolio personalization, both for managed accounts and TDFs alike.
Instead of just participant age, additional data points like gender, account value, salary, bonus, deferral rate, employer match and other plan sponsor benefits are starting to be fed to managed account services to provide improvements in personalization in the absence of any participant engagement.
“We believe this will, on the margin, further improve the argument for the use of managed accounts as a QDIA in that investment portfolios would be modified as needed based on differences not just in age but also individual retirement readiness relative to their age cohort when defaulted without any participant engagement,” the paper states.
It goes on to say expect the lines between TDFs and managed accounts to further blur, particularly with the rollout of QDIA model portfolios which leverage a managed account chassis to personalize model portfolios, not at the participant level but at the plan level.
Trending Up: QDIA Model Portfolios and Personalized TDFs
The paper is bullish on the future of QDIA Model Portfolios, which leverage a managed account chassis to create personalized model portfolios at the plan level, and Personalized TDFs, where a managed account chassis would use the same participant demographic information (income, savings rate, plan balance, etc.) to enhance participant assignment and allocation to a TDF vintage portfolio(s) based on more than age alone.
“Arguably, both QDIA Model Portfolios and Personalized TDFs are poised to better facilitate a Hybrid QDIA experience,” the paper says, with participants seamlessly transitioned into a full-fledged managed account portfolio the moment they engage to volunteer additional data points related to their financial circumstances, goals and retirement intentions.
Wilshire anticipates QDIA model portfolios will not only be offered at no additional cost to the plan sponsor, but also include additional discounted fees for recordkeeping services, provided these solutions also incorporate the stable value and other proprietary offerings affiliated with the recordkeeper.
“So long as these solutions find a way to address the performance reporting requirements of plan sponsors and their consultants, we believe QDIA model portfolios may gain significant traction and uptake by retirement plans,” the paper says, adding that this is likely to be especially true for small- to mid-sized plans long unable to access CTDFs.
Advisor Managed Accounts and Lifetime Income Solutions
Wilshire says advisor managed accounts are uniquely positioned to amplify the role and value of the advisor, who will increasingly provide advice not just at the plan but also the participant level, democratizing the availability of advice on not just investments, but also savings strategies, retirement age, Social Security claiming strategies and withdrawal strategies to a broader range of participants.
The paper says this also has significant implications for IRA rollovers and wealth management considerations more broadly, with investors with smaller account balances remaining within the retirement plan where they can be better serviced via digital advisory services, and those investors with greater wealth and complexity rolling out of plan to receive enhanced financial, trust and estate planning services.
“Irrespective of whether the participant remains in-plan or rolls out, we anticipate managed account services, especially AMA, will increasingly feature more comprehensive financial planning services, financial wellness offerings and advice with respect to insurance products,” the paper states.
One of those insurance products? Annuities, of course, in the form of in-plan lifetime income solutions which have been “turbo-charged” by the SECURE Act.
“The key enabler of these solutions will likely be TDFs and managed accounts, with plan participants benefiting from the purchase of annuities to protect against the combination of uncooperative investment markets and long life,” the paper says.
Understanding the cost and complexity of the different annuity products and features is daunting for plan sponsors and participants alike, which the paper says explains the “extremely low uptake within DC thus far despite the strong benefits that accrue to investors.”
Wilshire believes uptake will only happen if facilitated through professionally managed portfolio solutions, namely TDFs and managed accounts. “Here, tremendous innovation is already underway. A handful of TDF solutions have already been launched in recent years which incorporate the purchase of SPIAs, DIAs, QLACs or GLWBs and similar innovations are beginning to play out across managed account providers,” the paper says.
The benefit of this approach include the use of third-party financial experts to oversee the selection, negotiation and monitoring of the specific annuity product and insurance provider, determining how much to annuitize, and leveraging the pooling of participant assets to do so on more advantageous terms—particularly without commissions of 5% or higher—than available to individual investors in the retail market.
Read the white paper, “The Future of DC: Personalized Investing,” at this link.
SEE ALSO:
• Advisors Miss Great Opportunities in Target Date Funds
• Custom Target Date Funds Need Personalization
• Principal Rolls Out Hybrid QDIA to Meet Rising Market Demand
• Nationwide Adds Income America ‘5ForLife’ for Managed Account Participants