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The transition from a “big three” (Fidelity, Vanguard and T. Rowe Price) investment manager oligopoly to an advisor-dominated participant-centric industry is happening. Advisors are playing a key role in the transformation. Despite their popularity, target-date funds (TDFs) are one-size-fits-all, set-it-and-forget-it approaches that are limited in their suitability because investing is personal.
TDFs are losing their status as the most popular qualified default investment alternative (QDIA).
Custom TDFs
Approximately $500 billion of the $3.5 trillion in TDF is customized by advisors who use the funds on a platform to populate a “custom” glidepath that is not customized for the plan. It is not a one-size-fits-all solution. Custom TDFs are popular with larger plans and are provided by marquee consulting firms.
Flexible TDFs are an extension of this idea. They are more honest in the sense that they more closely match their glidepaths with client demographics and risk tolerances. They are being used successfully in smaller plans, as discussed in the next section.
Flexible TDFs
Thousands of advisors to smaller 401(k) plans have banded together to form the Retirement Plan Advisory Group (RPAG). RPAG has attracted $40 billion in flexible TDFs in the past four years. Flexible TDFs are a family of low-, middle- and high-risk glidepaths that give fiduciaries flexibility in their QDIA choice, and they give self-directed participants flexibility in managing their risk through time. About a third of the assets in TDFs are from self-directed participants.
The next step in personalization is the move from funds to accounts.
Personalized target-date accounts
The most recent innovations piggyback on flexible TDFs. The path from flexible funds to personalized accounts is short and is being introduced by investment firms like PIMCO and Franklin Templeton, recordkeepers like Empower, platforms like Envestnet, and product developers like me.
Personalized target-date accounts (PTDAs) blend target-date glidepaths with managed accounts. While these accounts share similarities with flexible TDFs, like the provision of multiple glidepaths, they offer specific advantages for advisors who become partners.
Specifically, advisors play a more active role with certain PTDAs where they are responsible for selecting the underlying funds and allocations to them. This is the ultimate in customization. Importantly, there is a family of risk-based glidepaths, similar to flexible TDFs, so it is not one-size-fits-all as are customized TDFs.
The underlying funds along the glidepaths are on the existing platform so they have been vetted and approved. Participants see their positions as allocations to individual funds rather than as a holding in a CIT.
Conclusion
TDFs are getting better. That’s the good news. But it will take time because the TDF industry is dominated by a few firms that form an oligopoly that is hard to disrupt. It’s no surprise that non-oligarchs are spearheading the movement to personalization.
The 40 million investors in TDFs will be the benefactors.
Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show.
His passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, Baby Boomer Investing in the Perilous 2020s, and he provides a financial educational curriculum.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.