Commenting on the dramatic growth of target date funds(TDFs) in defined contribution plans, the head of retirement research for Morningstar blogging in the Wall Street Journal (subscription required) asks the obvious question: when will we move to more customized solutions? Managed accounts offer that option but barriers include costs and engagement.
While many plans offer managed accounts as an option, the key is whether they are offered as the default option or QDIA which has spurred much of the growth of TDFs. Managed accounts are one of three options for a QDIA including risk based and TDFs. Each investor can not only get a customized portfolio using managed accounts, using technology and data (robo-advice), they may also be able to suggest optimal savings rates and retirement age which becomes more precise when outside assets are considered.
Managed accounts can cost as much as .5% plus the underlying investments and have been the subject of recent lawsuits for paying a portion of their fees to record keepers as revenue sharing. The other issue is whether participants will engage and provide personal information to help managed account providers customize the portfolio.
A simple solution on the road to customization is offered by flexPATH, a partnership between NFP and BlackRock, using multiple underlying asset managers where an investor can pick the moderate, conservative or aggressive version of their TDF suite rather than everyone born within five years getting the same investment.
But other firms like Envestnet Retirement Solutions are trying to get even more customized using a participant’s age, salary, deferral rate, account balance and access to a DB plan as well as participant behavior to automatically suggest a portfolio. Relying on subsidiary which can scrap the internet to get information about a person’s outside assets, the Envestnet solution gets closer to true customization. The issue is data: will record keepers give up the information on each participant and is the information about outside assets complete and accurate.
Technology and big data will allow DC money managers to move beyond putting all investors born within five years of each other into the same fund. Plan sponsors as good stewards for their employees and advisors need to start asking these obvious but difficult questions to start moving the DC market towards greater customization which will lead to better outcomes.