Will TDF Series Based on ETFs Become the Norm?

Sitting down with PLANADVISER to discuss his firm’s recent target-date fund (TDF) product launch and wider industry trends, Todd Lacey, chief business development officer at Stadion, said the key theme of the TargetFit TDF line is flexibility.

“These new strategies are coming at a time when the vast majority of target-date products available offer only one glide path,” Lacey observed. “The reality is retirement plan sponsors and their participants are looking for investment solutions that are more tailored to their individual needs.”

Plugging for his firm, Lacey said he is “excited to see what traction TargetFit will gain in the retirement market in the months and years to come.” In short, the solution offers three levels of risk within the same TDF family, leveraging exchange-traded funds (ETFs) wrapped within collective investment trusts (CITs) to keep costs as low as possible. 

Lacey acknowledged the fact, raised by some researchers and industry analysts, that an increasing number of managers have chosen to offer additional “flavors” of target-date fund products in response to various stimuli, resulting in a saturated marketplace in which it can be difficult for new products to gain significant assets. Indeed, recently firms with long-standing active target-date series have launched indexed or blended funds, using elements of both active and passive investing, while other target-date series have been launched to serve other purposes. Against this backdrop, Lacey voiced confidence that the best products will always gain the most assets, even in a crowded marketplace, and so he downplayed the risk of this new launch failing to catch on or cannibalizing assets from the firm’s existing products.

What makes the TargetFit line a new and unique product, he said, is that the glide paths utilize a series of carefully tailored components in different blends designed to offer varying levels of risk exposure. The three underlying components are labeled Strategic Equity, Strategic Fixed Income and Flex. The Strategic Equity component “remains fully invested in equity positions at all times, while retaining the ability to strategically adjust the allocation among various equity positions.” The Strategic Fixed Income component “remains fully invested in fixed-income positions at all times, while retaining the ability to strategically adjust the allocation among various fixed-income positions.” The Flex component is “actively managed between equity positions, fixed-income positions, and cash/cash-equivalents depending on the risk level of the market as determined by Stadion’s proprietary Short Term and Long Term models, which are each applied to 50% of the Flex.”

The complementary structures of the underlying investments allow the firm to offer three distinct glide paths in the TargetFit line—one conservative, one moderate and one aggressive. Naturally, this approach is meant to allow participants to have highly tailored portfolios that more closely match their individualized risk tolerance and time until retirement. In a bid to keep fees as low as possible, the firm used ETFs as the primary underlying investment vehicle, Lacey confirmed, and the TDFs can operate in “multiple open-architecture platforms” because they are wrapped in collective trusts. 

NEXT: Offering both managed accounts and TDFs

One interesting aspect of Lacey’s job is that he is tasked with overseeing both Stadion’s TargetFit TDF offering as well as the nearly 2-year-old StoryLine managed account product set. As Lacey spelled out, it was not all that long ago that investors who were automatically enrolled into retirement plans were almost exclusively placed in stable value funds, or perhaps money market funds—investment approaches deemed to be safe and prudent for any of the small number of people actually defaulted into retirement plans pre-Pension Protection Act.

Today, nearly a decade after passage of the major reforms in the PPA, the steady stream of highly customizable products and services targeted at automatically enrolled defined contribution (DC) plan participants tells a different story. A wide variety of investment providers—from the most passively minded indexing specialists to more daring tactical managers—compete for the coveted qualified default investment alternative (QDIA) slot on retirement plan menus. The firms offer a huge variety of philosophies about what approach is best for “auto-participants.” Sometimes today, the conversation is framed as “managed accounts or TDFs, but not both.”

Lacey said Stadion has reached the conclusion that “it is not a matter of managed accounts vs. TDFs.” In fact, at his firm the two approaches are highly complementary and help the firm serve a much broader range of participants than could be reached previously with just the StoryLine managed accounts. The reason for this, as Lacey candidly explained, is that the major recordkeepers today are absolutely swamped with backlogged client requests and the daunting task of updating their offerings and meeting the challenges of fee compression and regulatory uncertainty.

“We have established some great relationships with some of the big recordkeeping providers, but frankly in this environment it is increasingly difficult, even when they really like our product, to prioritize even the small amount of development work that will go into adopting our managed account product,” Lacey said. “In response, we have shifted our strategy and have been finding success going to smaller, regional and independent recordkeepers. They can be more nimble, and they have helped us expand the footprint of the StoryLine managed accounts.”

Lacey described the TargetFit launch as a complementary strategy in that the TDF products will be widely available on essentially any open-architecture recordkeeping platform. “This allows us to bring the philosophy of tailored service and personalization of the StoryLine managed accounts to a much broader audience investing in TDFs.”