Unitized Model Portfolios: A Crucial Next Step in Retirement Plan Product Innovation

Article Presented By:
Securian Financial

The only constant is change—it’s cliché but apropos, particularly to the retirement plan space. Demographic and structural transitions in the country’s saving and investment system mean more reliance on the individual to satisfy retirement funding needs.

The industry has responded with innovative solutions to assist in positive retirement outcomes, capitalizing on technology to develop revolutionary products that balance ease-of-use with customization demanded by the most current crop of consumers.

The latest, unitized model portfolios, are getting an increased amount of attention from advisors who want to “take target-date funds to the next level,” according to Kent Peterson, Vice President with Securian Financial.

Unitized model portfolios provide advisors with the flexibility to customize investment solutions based on a broad range of investment objectives, while also simplifying investment decisions for participants, according to the company.

Kent Peterson

Peterson spoke with 401(k) Specialist specifically about what they are, how they work and why they make so much sense, especially now.

Q: What are unitized model portfolios and what type of advisor would be interested in using them?

A: This is not for every type of advisor, necessarily. It’s more of a value proposition for retirement plan specialist advisors who focus on investments as a part of their practice. Wealth management firms that also offer retirement plan consulting are an example.

They are very comfortable with building portfolios for individual investors in their wealth management business, and it’s really about extending that across to their retirement plans. They might say, “Okay, target-date funds are a reasonable tool for retirement plans, but they are not necessarily the best Qualified Default Investment Alternative solution as they tend to contain proprietary fund options, many of which they would never hire for use in retirement plans as standalone investments.” So, if you’re an investment advisor with the capability to build your own models, you’re going to conclude that, “I can do it better.”

Q: Better how, specifically?

A: You don’t have to necessarily change the world with regards to glide paths, but when you use prudently selected active managers that are not necessarily from one fund family, it more naturally aligns with the drivers of improved future outcomes.  In addition, a low-cost approach leveraging the vast universe of passive ETFs provides an opportunity for broader diversification with improved risk-return characteristics of the efficient frontier.

In many ways, it allows those advisors to illustrate their value proposition with plan participants. And if individuals leave employment but want to continue to use these sorts of models, they can continue to work with the advisor through the wealth management part of the firm.

Q: What has been the reaction so far from advisors—skepticism, acceptance, excitement—and how steep is the learning curve surrounding unitized model portfolios?

A: Again, it’s for specialized practitioners who have integrated the investment due diligence they perform for retirement plans and wealth management into a cohesive thought process and business strategy.

Other firms that are not necessarily as far along in the thinking maybe still look to the ease of target-date funds and are therefore what they prefer to use. But over time the question really comes back to, “What is the advisor’s value proposition and do target-date funds truly support it?”

If they pick proprietarily-built target-date funds, and ultimately 70 to 80 percent of the assets go to those funds, it may undermine a lot of the 3(38) work that they do with the other core investment options for the plan. So, I think over time more and more advisors are going to think this through and say, “It’s in the best interest of the plan if I actually leverage my 3(38) due diligence to take the target-date fund or the risk-based portfolio to the next level.”

Q: So what value does Securian Financial bring to advisors who use the models?

A: This has been an interesting step forward for Securian. We’ve always been a firm that’s very agnostic on which investments are selected by the plan fiduciary. We let clients pick investments that are best for their plan, and we don’t differentiate on price based on which investment options are selected. We focus on plan fee levelization, whether on a pro-rata or a per participant basis. As we think through unitized models as additional core investment options of the plan, we are able to continue that practice.

Q: Are unitized model portfolios a natural outgrowth of technological innovation in the retirement plan space?

A: Technology is definitely changing the retirement industry. When target-date funds were first developed, it was difficult to imagine how an advisor could build their own. Yet today, with rapid advancements in technology, it’s very easy for advisors to construct these models and use them across 10 or 100 different plans because they can build global models. This really creates what I would call an economical way for advisors to provide this higher level of investment service. If we think about it, it’s a testament to how technology is going to impact the retirement plan space. We know it will continue to evolve, and the standard bearers of today, whether it be target-date funds or something else, will likely find that there was a time and a place for them, but that time and place is in the past.

To read the full whitepaper, click here.

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