Though Target Date Funds (TDFs) continue to gain traction in Defined Contribution (401(k) and 403(b) plans) with no end in sight, the attraction is not the vehicle itself – it’s the realization that DC participants are incapable and unwilling to manage the money themselves. TDFs were just the 1st wave of professionally managed investment made popular because all that you need to know to assign an investor into a portfolio is their age. But no one believes that TDFs are the destination, just a stop along the way of the evolution of DC plans. So are managed accounts the next stop?
According to research by Empower Retirement and their managed account subsidiary, participants using a managed account had a 2% advantage studying almost 2,000 plans with over 315,000 participants. But here’s the rub: how do you get participants to engage and, how much does it cost? Costs are coming down thanks to technology (can you spell “robo advisor”?) and the use of passive/index funds. Engagement is still an issue yet to be resolved.
Providers like Envestnet partnering with MassMutual, Charles Schwab and Russell use data regularly available from record keeping files to assign participants based on age, salary, account balance, deferral rates and other factors. Soon we should be able to pull in data from other accounts to more accurately assign an investor into the right risk profile using LDI (liability driven investing) common to DB plans.
So the Empower research is interest (although I’m loath to trust research from a product provider which shows their product is working – call me cynical). But it makes sense and I support the discussion, research and movement beyond TDFs because, without it, we’ll be stuck in TDFs for too long. Nice stop along the way but certainly not the final destination.
