Nearly 59% of retirement assets now reside in individual retirement accounts and defined contribution plans – which 30 years ago represented only 19% of retirement assets.
Product innovation, along with regulation and demographics, has helped shape the retirement market.
A new whitepaper from SEI’s Investment Manager Services unit examines how product innovation is currently reshaping the retirement market.
The paper, Forces of Change in an Evolving Retirement Market, outlines several threads of innovation that have emerged in the defined contribution space over recent years.
“While each thread plays a role individually, only when woven together do they create a strong fabric,” the report says.
These innovations include asset allocation solutions, alternatives, open architecture, product packaging and customization.
1. Asset Allocation Solutions
Increasing adoption of automatic plan features and innovation with retirement income has increased preference for asset allocation solutions like target-date strategies and managed accounts.
As a result, target-date assets grew quickly on the back of strong flows over the past decade. According to the report, the target-date market has roughly $1.3 trillion in assets, and target-date approaches appear to be a clear favorite of regulatory agencies.
Current areas of innovation within the target-date market include tactical flexibility, use of alternative strategies and open architecture.
Meanwhile, managed accounts are another asset allocation solution that provides sophisticated drawdown strategies, often taking into account specific guaranteed income products. The report points to data from Plansponsor magazine that shows managed accounts oversee $200 billion in participant assets.
Managed payout funds are a more recent addition to the retirement solutions scene, according to the report.
“Structured to provide a consistent, inflation-adjusted monthly income stream for a fixed term or the life of the retiree, these funds resemble annuities,” the report says. “But they differ in some important ways, not least of all by being less expensive and more flexible.”
Payouts also might fluctuate significantly depending on fund performance, according to the report.
“In any case, this type of fund, where the manager is responsible for distribution in addition to asset allocation, could well become another popular default option,” the report says.
2. A Growing Role for Liquid Alternatives