On December 8, 2022, Retireholics hosted a debate on a topic that is on everyone’s minds in the 401k industry. Which is better: target date funds (TDFs) or managed accounts (MAs)? TDFs are the most popular Qualified Default Investment Alternative (QDIA) with MAs a distant second, but that could change with the current unravelling in TDFs.
We have a winner
Given the popularity of TDFs you would have thought that they would win the debate hands down, but not so. This loss was due in part to the ineptitude of the pro-TDF debater, namely me. My challenger, Todd Lacey from Stadion, was masterful, so he deserved the win. In my defense I am more focused on what TDFs should be so I could not in good faith defend the current TDF industry because I believe it needs to improve big time. I instead defended my vision of what TDFs can and should become.
End of the story: The Challenge
The real meat in the debate came at the end of the show when we discussed the future of QDIAs. Todd and I have similar views. Investing is personal and cannot be served by a one-size-fits-all-set-it-and-forget-it TDF. A questionnaire for MAs might be better, but only if the participant is willing to share personal information—a tall order for defaulted participants who have no clue.
The challenge is doing the best for people who want everything done for them—no questions asked. Some marriage of TDFs with MAs has the potential to serve this need. Call it “Personalized Target Date Accounts (PTDA).” A Google search on these words reveals several current offerings, so the idea is a reality that is not yet fully developed (see for yourself).
Conclusion: The Future
PTDAs are not yet what they will ultimately become. The ultimate PTDA will serve both defaulted and non-defaulted participants because $1 trillion of the $3.5 trillion in TDFs is from non-defaulted participants who are limited to the one TDF on their platform. Here are some of the traits that will best serve participants:
- Protection in the Risk Zone spanning the 5 years before and after retirement. Sequence of Return Risk is managed.
- All-in fee under 20 bps: less than half the average TDF’s 40 bps and Managed Account’s 50 bps.
- Monthly allocations remove the 5- or 10-year cohort limitation. Very precise.
- Non-defaulted participants can move to any risk level anytime—low, middle or high—and these risks can be blended, like 60/40 high/mid.
- Non-defaulted participants can change their target date anytime and it is specified down to the month—mm/yyyy.
- Risk focused, rather than performance. Win by not losing.
- Solve the one-size-fits-all problem.
- Easy to use.
Our technological revolution makes these possible, so expect them. Participants deserve them.
Ron Surz is President of Target Date Solutions, a DBA of PPCA inc. He is also the author of Baby Boomer Investing in the Perilous Decade of the 2020s. He can be reached at Ron@TargetDateSolutions.com.
SEE ALSO:
• Coming Soon to a 401k Plan Near You: Personalized Target Date Accounts
• Beware: Target Date Funds Ignore Sequence of Return Risk
• Retireholiks – 401k Specialist Issue 3, 2021