Investing is personal, so fund managers are coming to market with Personalized Target Date Accounts (PTDAs) that meld target date glidepaths with managed accounts, thus removing the one-size-fits-all shortcoming of target date funds (TDFs). But the managed account aspect has its limitations.
I introduced PTDAs 2 years ago. This year several prominent investment management firms have introduced their versions of PTDAs.
This year’s PTDAs are positioned as Qualified Default Investment Alternatives (QDIAs), so they need to address the challenge of making decisions for people who do not want to engage—you really don’t know what they need and want. These decisions for defaulted participants are based on recordkeeper data like account balances, contributions, salary, etc.—no emotions, just wealth.
But recordkeeper data says only a little about participant wealth because the median tenure of participants is less than 5 years, and even less for those most likely to be defaulted into participation—workers under age 35.
PTDAs that are Actually Personalized
As a practical matter, personalization works best for people who want to engage—for self-directed participants. This is not a QDIA. We can know what these people need and want because they tell us. About a third of the $4.5 trillion in TDFs is from self-directed participants.
PTDAs also give plan sponsors the flexibility they need to comply with DOL guidance to match their TDF to workforce demographics. Fiduciaries know how to use PTDAs for the best interests of defaulted participants as a group rather than trying to make individual decisions as is the case with this year’s PTDAs.
Someday Artificial Intelligence might provide the wealth information needed to personalize for defaulted folks, but that day is not now.
In other words, PTDAs give fiduciaries and self-directed participants the wherewithal to manage their own unique target date accounts. That’s a big deal, and an innovation in target date investing. TDFs had not evolved in the past 15 years, until now.
How PTDAs Work: Choices
PTDA choices are straightforward: Risk and Target Date.
It’s all about glidepaths. PTDAs provide multiple glidepaths like those shown below. These can be blended and changed anytime. My glidepaths are unique in their U shape that defends against Sequence of Return Risk near the target date and re-risks in retirement. These paths are both “To” (lowest risk at the target date) and “Through” (serving a lifetime). Your most important choice is your risk near retirement in the Risk Zone.
The other choice is the retirement date that is recognized as the actual day rather than grouping the participant into 5-year or 10-year age bands. This can also be changed at will. The system can be “tricked” by choosing a later or earlier date than actually anticipated. Earlier increases safety and later increases risk.
Importantly, the investments used in PTDAs are the best in each asset class rather than limited to the funds of a particular investment manager as is the case with most TDFs. A common complaint about TDFs is that the underlying management is all proprietary, so you pay a fund company to hire itself as an asset manager in addition to its glidepath. PTDAs can be less expensive than TDFs.
Recordkeepers and investment advisors play key roles in structuring and implementing PTDAs. Investment advisors select the underlying managers and help customize the QDIA. Recordkeepers collect participant decisions and rebalance accordingly. PTDAs are great opportunities for recordkeepers and advisors.
Conclusion
We all have our life paths that cause us to be more or less risk sensitive at various times. PTDAs give self-directed participants the ability to manage those risk preferences, and they give plan fiduciaries the tools to customize their QDIA decision.
Hooray for innovation!!
SEE ALSO:
• Recommendations to the ERISA Advisory Council Regarding Target Date Funds