A Decade After PPA and the QDIA Debate Continues

The transition period, from five years before retirement to five years after, is the most critical phase of lifecycle investing—and potentially the most difficult to manage with a standard TDF glide path. 

Ron Surz, president and CEO of Target Date Solutions, is among the retirement industry professionals who commonly offers his own independent analysis in response to PLANADVISER articles and big news from other trade publications. 

Regular readers may know Surz as something of an outspoken and unabashed critic of a lot of the thinking behind proprietary and bundled target-date funds. His website suggests that target-date funds (TDFs) are “a reasonably good idea” but with poor execution, “at least so far.” So it was no surprise to see him offer commentary in response to our recent articles speaking to the virtues (and some of the drawbacks) of bundled approaches to recordkeeping and target-date fund investing.

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Recently Surz has been focused on the theme of “combining TDFs with managed accounts to create personalized target-date accounts, or PTDAs.” Leveraging the open-architecture approach, he says PTDAs are customized to each participant’s circumstances and goals while also striving to get around the natural limitations of one-size-fits-all glide paths associated with big proprietary TDF products.

“Managed account providers can help participants identify appropriate risks and offer input on customizing risk exposures along the best TDF glide path,” Surz explains. “Recordkeepers have their role to play in managing the allocations to personalized age-and-risk appropriate models.”

Speaking frankly, Surz says the best managed account is delivered in tandem with face-to-face individual consulting, “but this is expensive, so true one-on-one managed accounts are generally limited to the executives of companies.” However, increasingly there are effective managed accounts available for the rank and file through so-called “robo-advisers,” which provide computerized automated guidance.

“The Department of Labor recommends the incorporation of workforce demographics into TDF design,” Surz adds. “This can only be accomplished with individualized choices. Some participants will have savings outside the DC pension plan, so they don’t need to generate high returns, arguing for conservatism. Others might not have saved enough, so they require higher investment returns associated with aggressiveness.”

NEXT: Related arguments from the biggest fund providers 

Surz’s firm is far from the only provider in the retirement investing industry to speak about expanding and improving the lifecycle investing conversation. Way back in 2013, Russell Investments introduced its Adaptive Retirement Accounts to provide a way for defined contribution (DC) plan sponsors to further enhance their plans’ default option. The solution leverages existing investment options and draws on participant information that can be made available from the recordkeepers (e.g., age, savings deferral rate, current account balance, salary and defined benefit pension benefit) to determine the appropriate asset allocation for each participant based on how “on-target” they are toward meeting their specific retirement income goal.

Importantly, this can all be done without requiring a great degree of direct participant involvement, since the necessary information to create the customization already resides with the recordkeeper or on the plan sponsor’s human resources system.

In 2014, Charles Schwab introduced an open-architecture approach to the qualified default investment alternative aimed at getting sponsors to “consider the opportunities presented by combining a 401(k) plan based on exchange-traded funds (ETFs) with an independent managed account service from a trusted plan adviser.” Building plan defaults in this style can significantly reduce expenses for participants and brings more transparency to sponsors and other fiduciaries, the firm contends.

Whereas TDFs are typically built to suit wide swaths of investors—based heavily on the single metric of participant age—the ETF/managed account approach allows each workplace investor to create a portfolio that’s directly relevant to his or  her personal financial outlook, according to Schwab research. Extensive salary data, outside assets and specific risk tolerance considerations can be factored into the asset-allocation strategy. For plan sponsors, there is the added benefit of cutting out share class considerations that come along with mutual funds, he adds. Unlike mutual funds, which come in different share classes (i.e., with different expense ratios) depending on the size of the investment, ETF shares are generally priced equally.

NEXT: Importance of the recordkeeper 

Surz, even while he remains skeptical of bundled TDF approaches, agrees that “a skillful and competent recordkeeper will be the glue that effectively cements TDFs with managed accounts … The recordkeeper applies a proprietary process to manage to each participant’s risk preference and age.”

“Some may say that the removal of standardization is a problem,” for example for benchmarking and fee comparison purposes, “but it is a natural consequence of personalized solutions, including managed accounts,” Surz concludes. “In addition to reducing costs and meeting the risk preferences of individual participants, managed accounts more accurately manage to each participant’s age.”

Interestingly, some major providers, such as Empower Retirement, have started to implement approaches “designed to help plan participants whose retirement planning needs change over time.”

For Empower, this is embodied by the Dynamic Retirement Manager solution, “which takes into account the driving roles of participant inertia and engagement.” Given the fact that engagement with the plan tends to increase dramatically over time, the solution allows plan sponsors to direct their employees’ retirement deferrals first into target-date funds during the early portion of their working years. Later on, when a pre-determined set of criteria having to do with the level of assets and the employee’s engagement are triggered, the assets will automatically shift into a managed account.

Empower says the later-career transition to a managed account affords participants who have had success in the plan an opportunity to receive advice on a personalized retirement income strategy once they are ready for it. Of course, given the challenge in general of getting young people focused on retirement savings, it stands to reason the solution will be most effective when paired with such progressive plan design features as auto-enrollment and auto-deferral escalations.

“In an ideal world everyone in their first job would make all the correct and necessary decisions about investing for the future and would continue to do so throughout their careers,” observes Edmund Murphy III, president of Empower Retirement. "The reality is that retirement isn’t top-of-mind for many workers until later in life and by then their needs and goals are more acute and likely in need of customization.”

Retirees with Dementia in Need of Financial Assistance

A study by the CRR finds that while there are several sources of financial assistance for those suffering from cognitive impairment, some of these are underutilized.

Most retirees suffering from mild cognitive impairment or dementia need assistance managing their finances in order to prevent the risk of making financial mistakes or falling victim to fraud and abuse.

The Center for Retirement Research at Boston College (CRR) says the Social Security’s Representative Payee Program can be a major source of support for these individuals. The program allows a designated person to receive and manage another person’s Social Security Benefits — the only source of income for several American retirees. Payees also must submit reports to Social Security indicating that all expenditures were in the best interests of the beneficiary.

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However, the CRR’s research suggests that only 9% of those suffering from dementia and 70 years of age or older have a payee. And although this research points out that most retirees suffering from dementia have some source of financial assistance such as a non-impaired son or daughter, much can be done by social services organizations and financial services practitioners to help retirees manage their money and prevent falling victim to fraud.

According to the CRR, “Groups vulnerable to having no help available include those with less education, minorities, and individuals living in densely populated areas.” The research also indicates that those isolated from non-impaired spouses or children within 10 miles are likely to receive no financial assistance.

As for those suffering mild cognitive impairment or dementia and receiving financial help, most seek the assistance of a professional. According to CRR research, 63.2% of these individuals seek financial assistance through a power of attorney. About 36.6% receive help from a child, and about 29.1% receive help from a spouse.

The research also suggests that living in a tight-knit community and involvement with a religious organization may also increase the likeliness of having access to financial assistance. The CRR notes, “Having a strong community, as indicated by involvement with a Catholic Church or residence in a small county, is associated with being more likely to have help.”

Thus, it’s important for financial advisers to maintain strong, personal relationships with vulnerable clients.

The CRR’s study used data from the Health and Retirement Study (HRS) linked to administrative Social Security records in order to document what share of retirees with mild cognitive impairment or dementia use the Representative Payee Program or other sources of financial assistance.

“Are Many Retirees with Dementia Lacking Help?” can be accessed at CRR.BC.edu.

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