Target-date funds are “yesterday’s technology,” according to Jud Doherty, President and CEO of Stadion Money Management.
While target-date funds might be a “great solution” for workers choosing among a huge menu of offerings in a 401(k) plan, Doherty argued in a visit to ThinkAdvisor’s New York office Tuesday that over the past 30 years, they haven’t really worked, calling them a “one-size-fits-all” approach.
So if target-date funds are for yesterday, what about today and the near future? Doherty thinks that within the next 10 years, every 401(k) plan will offer managed accounts to plan participants.
In 2015, only about 36% of plan sponsors offered a managed account option in their 401(k) plans, according to Callan Investments Institute’s 2016 Defined Contribution Trends report. The report also found that target-date funds continue to be the most prevalent default choice of plan sponsors, at 86%.
According to Stadion’s retirement national sales director, Tim McCabe, nearly 90% of the firm’s retirement assets are in managed accounts.
Stadion released a robo-401(k) product nearly six months ago called StoryLine, which is a 401(k) managed account solution using SPDR ETFs. (Before StoryLine launched, Stadion gave ThinkAdvisor a sneak peek into the product.)
Since its debut, more than 500 retirement plans have signed up, according to a recent announcement from the firm. In addition, Nationwide, Lincoln Financial, Mutual of Omaha and Guardian Life have added it to their retirement platforms.
StoryLine was developed for the advisor-sold, micro- and small-plan markets, which Stadion says is “arguably the 401(k) industry’s most important…underserved segment. The StoryLine process first seeks insight into the overall plan makeup with the intent of tailoring default options for each plan sponsor, and then employees can further define their individual investment paths based on personal risk profiles.
In addition to the use of managed accounts in 401(k)s, there are two other trends that Doherty and McCabe expect see in 401(k)s’ future.
Customization and Personalization
A key component of Stadion’s StoryLine product are its customization and personalization aspects, the two executives said.
“In every other thing you do today, you have customization available to you,” McCabe said, but not in retirement plans, especially in smaller plans. “If you go to Nike, you can design your own shoe; I doubt you have the standard ringtone on your phone.”
Personalization in the retirement space, in McCabe’s opinion, is even more important.
Personalization revolves around accurately measuring a participant’s risk tolerance. Once a worker’s risk tolerance is accurately measured, “we can then create an asset allocation” that matches your risk tolerance, McCabe explained. “Not your stated risk tolerance, but your actual risk tolerance,” McCabe argued, “because if we can get that right, people will stay in” their plans.
ETFs in 401(k)s
ETFs are becoming more popular as investment options in 401(k) plans. Charles Schwab rolled out an all-ETF 401(k) plan in 2014. Betterment’s 401(k) platform, Betterment for Business, launched in 2015, also uses ETFs entirely.
However, most traditional 401(k) plans, especially those run by managed account providers, still use the underlying funds chosen by the plan sponsor.
Stadion, however, uses exchange-traded funds as the underlying investment vehiclse in its StoryLine 401(k) product, which helps keep costs low. “If a client comes to us and we’re managing their money, we use very low-cost ETFs to build the portfolios. So we end up being all-in about the same price as a target-date fund,” McCabe said.
Why aren’t ETFs more prevalent in 401(k) plans? “401(k)s live in a daily [net asset value] world,” he said. That’s why mutual funds are more popular, he suggested, since “they have a single price at the end of the day” while with ETFs “you have a multi-day settlement. So everything doesn’t tie up as clean every day, unless you do it like we did,” McCabe said.
To adapt ETFs for the retirement market, Stadion created collective investment trusts which allow them to operate within the traditional, daily NAV-expecting 401(k) world.
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