Using managed accounts is one way to address several of the above issues. Studies show that 61% of 401(k) participants want the personalized advice managed accounts offer.[7] In addition, when using managed accounts, participants tend to save more than when they use a TDF.[8] Lastly, whereas TDFs have a lack of customizability, managed accounts can be unique for each participant.
One factor that has historically been a perceived disadvantage for managed accounts is cost. However, costs vary widely and plan sponsors should consider simply asking cost-related questions rather than assuming which investment option is cheaper. Additionally, a plan sponsor should consider the range of services offered. Cost is often the deciding criteria, but plan costs are now more competitive compared to what they once were[9], and the additional services offered by managed accounts may make a reduced-service, lower-cost plan actually disadvantageous for participants.
Another TDF concern versus managed accounts is flexibility. Managed accounts can adjust asset allocations to changing market environments. While there are exceptions, a traditional target date fund is locked in to a certain annual asset allocation and does not have this flexibility.[10] A prime example of the benefits of flexibility can be found by looking back at the last bear market. From October 2007 to February 2009, the S&P Target Date 2010 index – which would be considered the benchmark for investors in a 2010 target date fund – was down over 26%. This wiped out the entire return the index earned from the end of 2003! Worse, numerous funds underperformed the index, losing a full 1/3 of their value. It is important to remember that 2010 Target Date Funds were purportedly the most conservative TDFs for participants nearing retirement at that time.
‘Take-Aways’
In a nutshell, the retirement landscape is evolving rapidly. TDFs served a very useful purpose in recognizing that participants often do not act on their own behalf. But massing participants along age lines is not an ideal solution for one simple reason: participants are unique. Rather than products designed for an industry or a government mandate, it may be time for plan sponsors to identify and install retirement plans that demonstrate awareness that the central focus has to be on the individual, unique needs and circumstances of each participant. We are going back to the future by developing products and services aimed at doing what plans were always supposed to do: help each participant toward the best possible retirement.
Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.