Ronald Surz, President of Target Date Solutions, recently announced the release of Soteria software that facilitates personalized target date accounts (PTDAs) by blending patented safe-landing target date glidepaths with the personalization of managed accounts.
Soteria is software as a service (SaaS) for recordkeepers that allows any recordkeeper regardless of size to provide PTDAs.
“Our pioneering innovation equips recordkeepers with software that revolutionizes 401(k) investing for both defaulted and self-directed participants,” Surz said.
Personalized target date accounts are investment portfolios that are designed to help individuals save for retirement. Like target date funds—the most popular Qualified Default Investment Alternative (QDIA)—these accounts provide a convenient and hands-off approach to investing, as the asset allocation of the portfolio is automatically adjusted based on the individual’s target retirement date.
By contrast, managed accounts—the second-most popular QDIA—slot the investor into a risk model based on questionnaires that generally miss Sequence of Return Risk. “Losses sustained in the Risk Zone spanning the 5 years before and after retirement can spoil retirement with dignity,” Surz said. “There are reasons that managed accounts are less popular than target date funds, not the least of which is high fees.”
But unlike target date funds, Surz noted that PTDAs are customized to the individual’s risk preference and retirement date, removing the one-size-fits-all shortcoming of target date funds. Also, unlike target date funds, investments are not all proprietary to the fund company, so best of breed investments can be employed.
PTDAs are not new
Surz added that some large financial institutions offer PTDAs, including Empower, BlackRock, and Lincoln Financial. “However, it is important to note that these services are proprietary, meaning that the investment portfolios are managed by the financial institution and not directly accessible to competing recordkeepers. It’s also worth noting that these firms recognize the value and importance of PTDAs.”
The unravelling of target date funds in 2022 has spurred interest in the other popular QDIA, so recordkeepers are touting their managed accounts, Surz said. But he added that “PTDAs provide a much better alternative that combines these two QDIAs, delivering the best of both.”
Recordkeepers play a crucial role in helping individuals save for their retirement. By providing PTDAs, Surz said recordkeepers can offer a customized investment experience that aligns with each participant’s unique financial goals and risk tolerance.
He said the new software is easy to use and low cost, about a tenth of the typical cost for managed accounts.
Why recordkeepers should provide PTDAs
Here are five reasons Surz provided as to why he thinks recordkeepers should provide PTDAs:
1. Customized Investment Strategy: A PTDA is a customized investment strategy that is tailored to the individual’s unique financial goals, risk tolerance and age. This ensures that the participant’s portfolio is aligned with their specific needs and investment horizon, which can improve their investment outcomes and overall financial security in retirement.
2. Increased Engagement: By offering a tailored investment experience, recordkeepers can encourage participants to take an active role in managing their retirement savings and ensure they are on track to reach their financial goals.
3. Improved Outcomes: A personalized approach improves the investment outcomes of participants and protects against sequence of return risk. This can lead to higher retirement savings and better financial security in the long term.
4. Increased Adoption: Personalization encourages more people to enroll and participate. By offering a tailored investment experience, recordkeepers attract more participants and increase overall adoption rates. Approximately half of 401(k) assets are in target date funds, confirming the appeal of the idea despite its one-size-fits-all shortcoming. PTDAs correct this shortcoming, increasing the appeal, and adoption.
5. Competitive Advantage: This is the most compelling reason. By providing PTDAs, recordkeepers differentiate themselves from their competitors and attract more clients. This increases market share and revenue in the competitive recordkeeping industry and addresses an advantage that some of the largest recordkeepers have.
“Simply put, smaller recordkeepers need Soteria to compete,” Surz said. “It’s a must-have with significant first mover benefits.”
For more information about Soteria, see this introduction to the product.
SEE ALSO: