Investing in defined contribution (DC) plans is different than any other market. Most plan participants don’t have access to a personal financial planner and they are among the least sophisticated investors – a deadly combination – which is why target date funds (TDF) have grown so quickly. Stepping into the void are robo advisors and tools that can automatically create and adjust customized portfolios for each investor. Two large DC record keepers, MassMutual and John Hancock, recently announced moves in those directions.
Though many DC plans hire advisors to help with participant education and advice, the reality is that there is a limited amount of time and follow-up that can be provided to each participant. They need guidance in creating a portfolio that is constantly rebalanced and morphs as their goals change especially as they get close to retirement age.
MassMutual, partnering with Envestnet Retirement Services, uses their technology to provide graphic illustrations on how much will be needed at retirement – and if the participant is falling short –customizing the default option based on the investors profile as well as gathering information about outside assets with technology from Yodlee, an Envestnet subsidiary. These tools, recently upgraded, promise to provide better outcomes because they adapt and are customized for everyone rather than putting all people born within five years into the same TDF suite.
Hancock announced a partnership with NextCapital, a robo advice platform, which is a pioneer in creating customized portfolios based on a participant’s age, salary, deferral rates, account balance and access to a pension plan adjusting as necessary.
Advisory firms like NFP Retirement, partnering with BlackRock, have made available semi-custom TDFs which allow investors the opportunity to pick an aggressive, moderate or conservative version of each suite of TDFs with other advisory groups following suit.
Technology and access to personal and financial data within a DC plan and outside should allow for better investment solutions and ultimately better outcomes. TDFs as the default option were never intended to be the final destination for next generation DC investing – just a stop along the path for investors that cannot afford access to personalized financial planning and wealth management.
