Target Date Solutions 2.0: Manager Lineup, Asset Allocation and Selection

Target Date Solutions 2.0: Manager Lineup, Asset Allocation, and Selection. Fred Barstein, Founder, and CEO of The Plan Sponsor University (TPSU), recently visited with Jennifer DeLong, SVP/Managing Director, Head of Defined Contribution for the Americas at AllianceBernstein in their New York Headquarters to discuss Target Date Solutions.  This conversation also addresses the benefits of using Target Date Solutions as the default option for defined contribution plans.

Ms. DeLong provides a perspective on changes and trends that she has observed in Target Date Solutions over the last twelve years.  Large plan sponsors are looking more at custom-based solutions where the plan sponsor has input on the Glidepath, Asset Allocation, and Manager-selection. They discuss the benefits of using an outside 3rd party to provide insight and guidance on manager lineup, asset allocation and selection – and how that may be reducing the risk for plans sponsors.

Target Date solutions 2.0 is also addressed as incorporating industry best practices and a multi-manager structure.

Full Transcript Here

Fred Barstein:               This is Fred Barstein with 401kTV, and I’m here in New York City at the headquarters of AllianceBernstein, one of the largest money managers in the world, and very focused on the defined contribution. I’m here with Jennifer DeLong, who’s a Managing Director and head of their defined contribution effort. Welcome, Jennifer.

Jennifer DeLong:          Thank you.

Fred Barstein:               Okay if we ask you a few questions today?

Jennifer DeLong:          Sure, that’d be great.

Fred Barstein:               One of the topics that are near and dear to the hearts of our audiences about the default option, which tends to be the target date, that’s the most popular. And there’s a lot of changes going on in the institutional market, and we’re wanting to hear and learn more about it because maybe that’ll come down market. Tell us, what’s going on with custom target date solutions in the institution market?

Jennifer DeLong:          Sure. We’ve been working with institutional plans for more than a dozen years in terms of designing better default options for their plans. What we’ve really been seeing, over the course of several years, is a move for those plan sponsors to want to customize their target date funds. What that means is that they are customizing the actual glide path. They’re also customizing the use of the different underlying managers, the ingredients that make up the target date fund. They’re also doing things like considering using alternative asset classes within their target date fund, asset classes that they wouldn’t necessarily want to use on a core menu, for fear that participants might only use those.

Fred Barstein:               Sure.

Jennifer DeLong:          But they can then incorporate those asset classes into their target date funds.

Jennifer DeLong:          The other thing we’re actually starting to see as well is that they’re now thinking about how to customize glide paths and asset allocation really to each participant, rather than just in those five-year bands, like traditional target-date funds.

Fred Barstein:               Sure.

Jennifer DeLong:          But perhaps that’s a topic for another day.

Fred Barstein:               Right. Why are these plan sponsors making this move?

Jennifer DeLong:          Well, we find that many of these plan sponsors, especially with their history of working on their DB plans, right, they really want to be able to design glide paths that are right for the unique demographics of their own plans. So, being able to customize that glide path for things like whether or not their participants have a pension plan, the average tenure of their participants, unique attributes of their own workforce, is something they’ve been very interested in.

Jennifer DeLong:          They also really like to have control over the managers that they use, as in their history in their DB plans. They would never use just one manager for all asset classes, so they want to be able to implement that in their target dates as well.

Fred Barstein:               Right.

Jennifer DeLong:          And as mentioned, they also want to be able to use some unique investments within their target date funds, things like alternatives.

Fred Barstein:               How does that translate down to the retail, because they can’t … they don’t have the assets to maybe customize as much, so what is happening in the retail market?

Jennifer DeLong:          Right. In the retailer or smaller ends of the plan market, we’ve really started to see sort of a 2.0 version of target dates as the product development in this space really continues. Now there are solutions available that really do incorporate some of those best design features that those large plans are using in custom target date in off-the-shelf solutions. So, things like incorporating the use of multiple managers within one target-date fund, again, with that concept or that idea that no institutional plan sponsor would ever use one manager for all asset classes.

Jennifer DeLong:          As an example, we actually have a target date series where we use Morningstar to be able to provide independent manager selection, so having that independence, or conflict-free organization choosing those different managers in an open architecture format. Also, there are target-date series now that do incorporate alternative investments, diversifying asset classes that are different than stocks and bonds. Then in our particular series, we do have one glide path, but it’s based on a dozen years of target date research, as well as all of our work in that very large plan market.

Fred Barstein:               The final question, and I’ve put this to the proprietary target date, the target date managers have only their own funds, which are the dominant of the top 10. They’ll say, “Well, just look at our performance.” And they want to be able to see, and they can see how all of these managers are working together because they have a closer view. What do you say to that?

Jennifer DeLong:          Well, I would say … You’re talking specifically about single manager target date funds, right?

Fred Barstein:               Yeah.

Jennifer DeLong:          I would say yes, many of them are doing very well. Now, we’ve obviously recently had a really great market, and many of them, especially the ones that are more equity-heavy, of course, are doing well.

Jennifer DeLong:          I think, though, more for plan sponsors, it’s really about thinking about their fiduciary responsibility, and choosing their target date funds going forward, in that the idea of one manager continually into the future over the long term time horizon of a target date fund being able to deliver performance on every asset class, we have to think about whether that’s something that’s likely to happen going forward. Then the other aspect I would say about that is that whole concept of independent manager selection? Without that, a single manager target date fund, the question is, will they remove or replace their own managers if they do become under-performing? You don’t really see that a lot.

Fred Barstein:               No.

Jennifer DeLong:          So, we really believe that independent manager selection, having, again, another party making those decisions as to when to remove or add managers is really, really important.

Fred Barstein:               Right. So, I think that what we’re advocating to our clients is target dates are good, some of the proprietaries are very good, but it really behooves you to look and see … look at some custom. They’re starting to come out. I know AB has a series of those, and it’s probably worth at least looking at and talk to your advisor, and see if it might be appropriate for you.

Fred Barstein:               Thanks for your time today, Jennifer, and thank you for watching 401kTV.

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