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- The unravelling of target date funds has generated demand for personalization.
- Recordkeepers are promoting their managed accounts, the second most popular Qualified Default Investment Alternative, but these are generally not personalized.
- New software equips recordkeepers with authentic personalization.
Assets in 401(k) plans are surging. According to the Investment Company Institute: “401(k) plans hold $6.3 trillion in assets as of September 30, 2022, in more than 625,000 plans, on behalf of about 60 million active participants and millions of former employees and retirees.”
55% of 401(k) assets — $3.5 trillion – is held in target date funds (TDFs), the most popular choice of Qualified Default Investment Alternative (QDIA). The current unravelling of TDFs is generating high demand for personalization because investors need and want better protection. Consequently, service providers have stepped up their marketing of managed accounts (MAs), the second most popular choice of QDIA.
There are reasons that MAs are less popular than TDFs, including high fees. Importantly, most MAs are not personalized. They use questionnaires to map participants into investment models, with the ubiquitous 60/40 stock/bond model at the core.
True personalization is expensive because it requires an investment advisor that works face-to-face with the participant. Because they are expensive, this form of MA is generally reserved for executives of the sponsoring firm.
The demand for personalization is high but the supply is low
No surprise, everyone wants what the rich guys get. The demand for personalization is escalating because investing is very personal. But the supply of personalized 401(k) investing guidance is almost non-existent and reserved for the elite. In situations like this where demand far exceeds supply, supply becomes exorbitantly expensive, as is the case currently, or someone comes to market with new supply, as is beginning to happen.
Help is on the way in the form of personalized target date accounts (PTDAs) that blend the two most popular QDIAs – TDFs and MAs – to benefit both defaulted participants and self-directed participants. A third of the assets in TDFs are from self-directed participants who are limited to the one TDF that is on their platform..
PTDAs are not new, but until now they have been in limited supply. Now software has been introduced that facilitates the creation and maintenance of PTDAs by recordkeepers. Recordkeepers are the solution to meeting the demand for personalized investment guidance. The revolution in 401(k) investing is just beginning.
It takes a team
In addition to an innovative recordkeeper, PTDAs need an investment advisor to select and monitor the assets. The new software integrates participant decisions imported by the recordkeeper with an investment line-up provided by an investment advisor, typically a 3(38) fiduciary. The investment line-up can follow themes like the following:
- Union friendly
- ESG/Sustainable
- Low cost
- Proprietary
- Timing
- Passive
- Active
The new software integrates service providers and QDIAs to best serves participants.
Conclusion
Retirement plan participants need and deserve a retirement with dignity. Standard QDIAs are failing to protect in the current economic environment, revealing a serious shortcoming, and creating demand for personal guidance that navigates through the retirement Risk Zone. Losses sustained during the 5 years before and after retirement can spoil retirement with dignity.
Personalized target date accounts address this need. Recently released technology enables an abundant supply to come to market, addressing the current supply shortage. Stay tuned.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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