TDFs, of course, have for years now been the runaway leader as a qualified default investment alternative in defined contribution plans, with $700 billion in DC assets. Some 40 percent of new enrollees are using them, according to the Investment Co. Institute.
While TDFs have been a game-changer, so, too, have technology-based managed accounts. Financial Engines’ story is enough to prove that point: a couple of technologists’ pipedream now serves about 30 percent of the country’s Fortune 500 companies.
But as innovative as those solutions have been, there’s always room for improvement.
Critics of TDFs say they don’t go far enough in tailoring the best strategies for individuals. Not every 40-year-old earns the same income, or saves and spends the same way, so placing them all in the same portfolio structure with the same glide-path is limiting, the argument goes.
Critics of managed accounts, meanwhile, say they’re hyper-managed, and costly.
What if there was a happy medium? What if participants could access the individualization of a managed account, at the cost of a TDF?
Dirk Quayle, president and co-founder of NextCapital, a Chicago-based software firm, says his company’s newest offering does just that, providing a QDIA that offers more flexibility than a TDF without the higher costs of managed accounts.
“What our platform delivers is the personalization of a managed account,” he said. “Individuals have a personal portfolio design, personal saving strategy, and personal glide path.
“But because we’re aiming for the qualified default alternative market, that means we have to be very competitive on price, and that’s where this solution is different from managed accounts.”
The software delivers a highly tailored portfolio design, even to the most detached participant, by mining for all of a participant’s available data through their plan record-keepers.
See also: Where DC plan sponsors fall short
Age, savings habits, income, account balances and projected Social Security benefits are all factored in, as are assets in a participant’s defined benefit accounts, should they exist.
Retirement plan providers that adopt NextCapital’s technology can then inject their own investment theology – their preferred allocations, products, risk assessments and so on – to make it their own.
Russell Investments and Transamerica have been the first adopters of the software, and both were investors in the $6 million NextCapital raised this September to push forward with its endeavor. Quayle says more deals with other major providers are in the works.
Russell, for one, just announced that Ingham Retirement Group, a Florida-based RIA and record-keeper, just re-enrolled its own employees in Russell’s Adaptive Retirement Accounts — a product made possible with NextCapital’s software. Ingham is now marketing the ARA to its clients.
Russell alone has more than 2,400 institutional clients around the world, so the potential for NextCapital’s ARA approach to catch on would seem to be fairly good.
“We’re proponents of target-date funds. They’ve had a major impact on improving participant asset allocation,” Andrew Scherer, director of defined contribution for Russell’s U.S. advisor business, told our sister site, BenefitsPro. “But their pooled nature requires an asset allocation framework that solves for a typical or average participant. We believe ARA represents the next generation of default investing.”
Because participants are automatically enrolled, ARA helps to address participant inertia. And there’s plenty of opportunity for participants who provide more detailed financial information to have greater control over their accounts.
“The more information they give, the better advice retirement providers and RIAs can deliver,” said Quayle.
So far there’s been no blowback from regulators. That may be because the new technology is at such an early stage as to have not drawn their attention.
While NextCapital — formerly known as Business Logic – and Russell designed ARA to be a plan’s QDIA, it ultimately is a plan’s fiduciaries that are responsible for the due diligence in selecting the platform as the QDIA, according to Scherer.
If NextCapital and its funders are to succeed in spearheading the next big thing in plan design, they may need some guidance from DOL and Treasury to make sure sponsors are comfortable with the innovation.
As in so much in the retirement industry, much is at stake.
That’s certainly true for NextCapital. Quayle said the company and its investors have poured “tens of millions” of dollars into its software over the past decade.
The firm has been building other variations of support technology for the last 15 years, previously for record-keepers, and also for the retail investing market, as well as in the managed account market.
“We’re evolving from a software company into more of a financial services company,” explained Quayle.
It’s not alone, of course. Massive investments by all sorts of companies are being made in online platforms, blending technology with financial services advice.
While most of their attention has been aimed at the retail market, Quayle says it’s only a matter of time before these tech providers turn their eye on institutional clients.
And that’s when we’ll really know whether anyone in the defined contribution realm wants to hang out with the new kid.