Target date funds have revolutionized the 401(k) market over the past decade. With well more than $1 trillion held in mutual funds, and hundreds of billions more in collective investment trusts, TDFs are by far the favored qualified default investment alternative of plan sponsors large and small. Data from various recordkeepers shows nine out of 10 sponsors use TDFs as their QDIA.
But are all those sponsors, and the tens of millions of savers invested in the funds, missing the boat?
Jason Shapiro, director, investments, at Willis Towers Watson, thinks sponsors and savers have better options than traditional TDFs. And he says those alternatives are available to all, not just large and mega sponsors.
“We don’t want to be prescriptive,” said Shapiro. “There are a lot of different ways for sponsors to structure plans for an eye to better retirement outcomes. But the ideas are out there, and we think each has merit and can be implemented in most plans.”
1. Managed accounts
Shapiro says managed accounts, which use data inputs beyond the age of a participant to create personalized savings strategies, are now offered in about half of retirement plans.
But while there has been growth in the offering of managed accounts, adoption is still low—around 9% when plans do offer them.
Cost-conscious sponsors may be playing defense in a litigious world by defaulting savers into TDFs, and not managed accounts, says Shapiro.
And some have been critical of managed accounts because the level of participant engagement needed to make the model cost efficient often isn’t there.
“Adoption is low because sponsors and not defaulting savers into them—participants have to opt in,” said Shapiro. “If you defaulted more participants in to managed accounts, it could be argued there would be less engagement overall, and less customization.
2. Hybrid model
Empower and Fidelity are among the record keepers that have rolled out a hybrid QDIA that defaults TDF savers into a managed account in their 50s.
The elevator pitch: The individual gets personalized savings advice near and in retirement, when they most need it.
A paper authored by Shapiro shows the wide disparity of return-seeking assets in TDFs and managed accounts.