GuidePost - Vol. 2, Issue 5 2006

The GRABot BAG
by Sherrie E. Grabot, CEO

October 2006
Making a good thing better: target-date funds improved

In our last issue, we discussed the success of target-date funds, and the significant drawbacks for retirement investors of an investment equation that relies on just one variable. We also ranked a set of “good/better/best” solutions, with participation of any kind as “good,” followed by target-date funds and full managed accounts. Plus we hinted at some kind of hypothetical, improved target date concept in between.

Maybe you already guessed what we were talking about. Well, it’s official now: GuidedChoice has just announced our new offering, Managed Accounts EZ. We believe it shakes up these rankings: while managed accounts still hold the “best” position, the new service offers a better solution for many participants that moves target-date funds down to simply “good.” In this issue we’ll preview how and why our latest offering changes the rules.

Personalized Retirement Investing, Made EZ
Target-date funds, lifestyle funds, or lifecycle funds. Whatever you call them, they’re very much in the news lately. And for good reason: by adjusting a broadly-diversified portfolio over time to meet a given retirement date, these funds-of-funds give savers a cost-effective investment vehicle that’s an absolute no-brainer to use. Recent studies have proven their effectiveness. And the Department of Labor is about to give them a regulatory green light as default investments for automatic enrollment.

So far, so good. One problem, however, is that retirement date alone isn’t always enough to meet individual needs, even approximately. What if the participant or their spouse has significant outside assets – or anticipates major expenses? The other missing element is savings rate. Even world-beating fund performance won’t get you to retirement if you don’t heed the ancient wisdom of 401(k): it’s not what you invest in that matters most, but when you start and how much you save.

We’ve always told anyone who’ll listen that the best solution is a personalized managed account based on a broad range of financial information. But for those who don’t have access to true managed accounts, Managed Accounts EZ offers the next best thing: a target-date investment vehicle, using the existing investment options in the plan, that also considers outside assets and recommends an appropriate savings rate.

More variables, better accuracy
Those of us in the defined-contribution business may forget the fact, but millions of employees still have traditional pensions, which often substantially affect retirement planning calculations. Information about pension assets serves as the second variable (after the participant’s age) for the analytics that drive Managed Accounts EZ. Unlike personal assets such as IRAs, employers can provide pension data to GuidedChoice automatically. This eliminates any concerns about ease of use and participation, and the new solution to work as a default investment option.

The second essential variable, savings rate, is often the final factor decided in the advisory process. Many would argue that it’s the single most important concern in retirement planning. Setting it too low is certainly part of any worst-case scenario (right up there with choosing 100% company stock!). Managed Accounts EZ automatically sets a savings rate – based on current savings, current income, target retirement date, and expected performance over the lifetime of the portfolio – that is likely to produce an adequate retirement income.

Most of the benefits, none of the effort
So how good is “better” for the average participant? Much better. We believe Managed Accounts EZ provide a huge “bang for the buck” that’s unprecedented in the industry. With no personal involvement and only a basic data feed from their employer, participants can now enjoy most of the benefits of a full managed account solution.

Of course, because the employer-provided information is limited, so is the effectiveness of any fully-automatic solution. And if participants don’t check in from time to time, the advice can’t keep up with changing individual needs. But even the margin of error can work in participants’ favor: if the system can’t account for outside assets like IRAs, it will tend to err on the side of more aggressive savings. I’ve never heard anyone complain about having too much money when they retire.

The real “rankings” will come from the numbers. We’re looking forward to doing some performance analysis, comparing the new offering to both standard target-date funds and full managed accounts as soon as we have enough longitudinal data. That will take time. Meanwhile, we’re very excited about Managed Accounts EZ – and we think the market find it’s a better solution, too.

~~ Sherrie

National Save for Retirement Week

Thanks to the ICMA-RC, a plan provider for state and local employees, and the NAGDCA trade association, the U.S. Senate has declared October 22-28 to be National Save for Retirement Week. They note that half of all workers have less than $25,000 saved for retirement, and have sponsored various promotional and educational initiatives to help do something about that frightening fact.

For now the campaign is directed mainly at public-sector employees, but it deserves a wider audience. Perhaps a partnership with PSCA’s 401(k) Day?

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