Target Date Funds:  A Real Solution or Just False Security?             

The Case for Using Managed Accounts to Improve Participants Financial Wellness.jpg


Whether you’re a plan advisor or plan sponsor, you have the same goal: improving participants’ financial wellness. An essential facet of reaching this goal is helping them plan for retirement.

In the past, this usually meant utilizing a target date fund (TDF).

However, there are many reasons this popular choice is worth reconsidering, especially in light of the many benefits provided for managed accounts.

Financial Wellness in Retirement Requires an Iterative Strategy

The assertion, “Prediction is very difficult, especially about the future,” describes financial planning. The uncertainty of future levels of inflation, interest rates, and asset returns can quickly make long-term plans obsolete. The best practice is to employ an iterative strategy:

  1. Plan
  2. Save regularly
  3. Allocate assets
  4. Reevaluate every few years

How TDFs Became Associated with Financial Wellness

TDFs became popular because they offer a ready answer to a question participants weren’t born knowing how to answer: how do you allocate your assets when saving for retirement? With a target year listed in the name, a TDF recommends itself. Participants barely have to think. Since participants’ asset allocations in TDFs seem reasonable and participants gravitate to TDFs so readily, plan advisors and sponsors favor offering TDFs in their fund lineups.

Unfortunately, these perceived benefits may not be as advantageous as they seem. In fact, TDFs may actually lead plan participants astray on their path to financial wellness.

The Problem with TDFs: They Solve Only One Step in the Strategy

The problem with TDFs is they offer a solution only for Step 3 in the financial wellness strategy listed above. They offer an organized schedule for shifting asset allocation over the savings horizon.

However, TDFs don’t solve the other three steps: TDFs are not a plan, they don’t tell participants how much to save, and they don’t re-evaluate the participant’s progress toward financial wellness.

It’s not until participants start edging closer to retirement that it becomes clear that their TDF isn’t going to provide the financial security they had thought it would.

A recent study by Nationwide and INResearch showed that only 43% of respondents used financial advisors. This means 57% are most likely not getting the guidance they need. Any of them who are using a TDF as their main investment vehicle in saving for retirement probably don’t understand how much they should be saving both inside and outside of the plan. They may also be unaware of what they can expect when they finally do retire.  So the question becomes: is a TDF really the best option to help someone improve their financial wellness and prepare for their future?

How Managed Accounts Succeed Where TDFs Fall Short

The obvious alternative to the all-purpose approach of TDFs is the customizable version provided by managed accounts.

As a QDIA (Qualified Default Investment Alternative), managed accounts offer a more customizable solution based on each participant’s individual goals.

Plan Participants Want Help Planning for Retirement

Even though they don’t want to become financial experts, plan participants do want help from their employer with figuring out how to plan for their retirement goals.

Consider the following statistics regarding plan participants:

  • 52% are looking to their employers for help understanding how much to contribute.
  • 67% report they would feel more encouraged to save if they understood the numbers better.
  • 61% would like to receive personalized advice about retirement savings.
  • 87% increase the saving rates of their plans after receiving such advice.

We also know that 36% of retirees report that their standard of living decreased after they entered retirement. So if the majority of workers are relying on TDFs and over a third of them are falling short of the most basic financial wellness goal, something is clearly wrong.

44% of women and 31% of men also say they were financially unprepared when they reached retirement.

Managed accounts provide an answer to these growing demands. By their very nature, they encourage participants to sit down and think through their specific goals. Then, through this experience, participants learn what will be necessary in order to meet their goals and which smart tradeoffs they must make to get there.

Managed Accounts Provide Ongoing Feedback

Managed accounts also avoid one of TDFs’ largest pitfalls: a lack of actionable feedback. As we said above, because managed accounts have specific targets, the feedback they provide is equally specific. It is based on important metrics like the participant’s:

  • Age
  • Contribution Rate
  • Available Assets Outside the Plan

Other personal details can be taken into consideration, too.

This allows participants to make necessary adjustments – with the guidance of the plan’s provider – long before they actually retire. That way, they’re not in danger of joining that 36% of retirees who see their standard of living drop once they stop working.

GuidedChoice Helps Make the Most of Managed Accounts

Even after learning about the benefits of managed accounts, many plan sponsors and advisors will object on the grounds that this kind of personal attention must come with higher fees. In comparison, target date funds are extremely cheap.

While this can be the case, it doesn’t have to be. At GuidedChoice, we are able to competitively price our managed accounts so the cost doesn’t outweigh their advantages.

Furthermore, our managed accounts are designed with an open architecture that allows us to customize them based on the plan or advisor’s investment strategy. This helps drive costs down and gives the plan far more flexibility.

Our robust digital investment advisory platform gives each participant a portfolio that’s tailored to them.

With a TDF, your company is locked into the fund family of that particular fund. There is no room for flexibility.

If you’re interested in learning more about managed accounts or how ours can give your plan participants far more control over their future financial wellness, please contact GuidedChoice and let’s talk.