Bifurcated Advancements in 401(k) Investments

ron surzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

target date

There are two distinct groups of 401(k) participants. The majority (75%) do not make an investment election, so they default their investment choice to their employer, who chooses an appropriate Qualified Default Investment Alternative (QDIA) on their behalf. Most of these defaulted participants (85%) are invested in target date funds (TDFs).

The remaining 25% of participants self-direct their retirement savings; they manage their retirement investments. The following table summarizes the two distinct groups and the two different approaches for personalizing their investments:

chart

Improvements for both groups have been introduced, but they are not yet mainstream. Personalized target date accounts (PTDAs) are the new best thing in 401(k) investing, but there are two distinct kinds of PTDAs to be aware of. In the following, I separately discuss each type of PTDA used as a QDIA – managed account and target date fund – and then I discuss PTDAs for self-directed participants, which is not a QDIA.