The transition from a Big 3 investment manager oligopoly to an advanced advisor-dominated participant-centric industry is happening now Advisors play a key role in the transformation. Despite their popularity, target date funds (TDFs) are one-size-fits-all-set-it-and-forget-it approaches that are limited in their suitability because investing is personal. Here’s what’s happening now that is transforming TDFs, the most popular Qualified Default Investment Alternative (QDIA).
Custom TDFs
Approximately $500 billion of the $3.5 trillion in TDF is customized by advisors who use the funds on the platform to populate a “custom” glidepath that is actually not customized for the plan, and is one-size-fits-all. Custom TDFs are popular with larger plans and are provided by marquee consulting firms. An extension of this idea is more honest and is being used successfully in smaller plans, as discussed in the next section.
Flexible TDFs
Thousands of advisors to smaller 401(k) plans have banded together to form the Retirement Plan Advisory Group (RPAG). RPAG has attracted $40 billion in flexible TDFs in the past 4 years. Flexible TDFs are a family of low, middle and high risk CIT glidepaths that give fiduciaries flexibility in their QDIA choice, and they give self-directed participants flexibility in managing their risk through time. About a third of the assets in TDFs are from self-directed participants. The next step in personalization is the move from funds to accounts.
Personalized Target Date Accounts
The most recent innovations piggybacks on flexible TDFs. The path from flexible funds to personalized accounts is short and is being introduced by investment firms like PIMCO and Franklin Templeton, recordkeepers like Empower, platforms like Envestnet, and product developers like me.
Personalized target date accounts (PTDAs) blend target date glidepaths with managed accounts. While these accounts share similarities with flexible TDFs, like the provision of multiple glidepaths, they offer specific advantages for advisors who become partners.
Specifically, advisors play a more active role with certain PTDAs where they are responsible for selecting the underlying funds and specifying allocations to them. This is the ultimate in customization. Importantly, there is a family of risk-based glidepaths, similar to flexible TDFs, so it is not one-size-fits-all as are current customized TDFs.
The underlying funds along the glidepath are on the existing platform so they have been vetted and approved. Participants see their positions as allocations to individual funds rather than as a holding in a CIT.
Conclusion
TDFs are getting better. That’s the good news. But it will take time because the TDF industry is dominated by just a few firms that form an oligopoly that is hard to disrupt. It’s no surprise that non-oligarchs are spearheading the movement to personalization. 40 million people in TDFs are the benefactors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.