DC Plan Experts See Slow, Steady Progress in Plan Personalization

Countless surveys and studies show that more personalized investment guidance and advice lead to better outcomes.

Consider a recent survey conducted by Goldman Sachs Asset Management that found competing financial priorities can erode defined contribution retirement savings for participants and, for potential solutions, pointed to tools such as financial wellness programs, digital investment advice and managed accounts.

But personalization for DC plans continues to be a moving target. In speaking to defined contribution investment specialists, personalizing for the individual often depends on how much work goes into the plan design to meet the needs of its participants. That is no small task when dealing with diverse participant pools, first-mover trepidation and a continued focus on low fees.

But as the below defined-contribution-investment-only experts note, progress is being made, if slowly, toward a more personalized experience for participants.

TDF Baseline

The reality for many plan participants today is the most personalization they see is by way of a target-date fund glide path catered to their expected retirement age. But as Cameron McCarthy of Morgan Stanley notes, that type of personalization only goes so far.

“Target dates can be evaluated for overall suitability relative to the plan’s demographics but stop short of personalizing the investment strategy at the individual level,” says McCarthy, an executive director and head of outsourced chief investment officer retirement and government portfolio solutions.

To get closer to personalization, he says, it often takes a concerted effort by plan advisers and sponsors to regularly evaluate “participant behaviors” and create an investment menu and supplemental financial wellness tools and programs to best address those needs.

“We believe plan sponsors and consultants can enhance their menu design through periodically evaluating participant behaviors and preferences through employee surveys, focus groups or by using plan data to evaluate participant allocation across the plan and trading behavior across various environments,” McCarthy says.

McCarthy also notes plan sponsor and consultant interest in using managed accounts to provide more personalized investment decisions, along with the potential for direct advice. But, at the moment, “participant adoption still appears low relative to other in-plan investment offerings, and the merits of these programs need to be evaluated appropriately,” he says.

Advice Optimization

Kerry Bandow, head of defined contribution solutions at Russell Investments, believes “age- and risk-based portfolios” go some way toward personalization, but says they only address “ one of the issues that you need to think about, which is how to invest the money.”

The next step, however, is creating an allocation that is “really dialed in” for the individual, alongside advice that takes into account the individual’s full financial picture. But those types of solutions are still in their nascent stages.

“Progress here is typical of progress in DC—a glacier’s pace, particularly at the large end of the market … partly because committees are keenly aware of litigation risk,” Bandow says. “Oftentimes, if you bring a new idea to [large plan sponsors], one of the first questions is, ‘Who else is doing this?’ and if the answer is, ‘Well, not many, or nobody,’ oftentimes they’ll punt and wait until there is broader utilization or adoption, simply because nobody wants to be on an island.”

When it comes to the closest personalization solution, Bandow names managed accounts as the best vehicle on the market. However, the increased price tag continues to give his team pause, particularly if it’s going to be used as the qualified default investment alternative.

“We like managed accounts; we’d love managed accounts if the price was lower,” he says. “If you can get a target-date fund for 5 basis points or use managed accounts and pay 25 basis points plus underlying fees for the investments, that can be hard to justify, given that not everybody is engaged.”

That engagement is key, Bandow says, because if they are engaged, they should pay for the cost. However, if they are “tripping into” managed accounts and are not engaged, then they are “paying a lot for a target-date fund allocation.”

David Cohen of John Hancock Investment Management, a division of Manulife, notes that personalization of 401(k) investment menus has evolved over the past several years, in part as “participants goals have shifted from a savings-focused mentality in their 401(k) plan to achieving a higher rate of return on their investments to generate income for their retirement goals.”

Cohen, global head of stable value and guaranteed product and U.S. head of retirement investment product, attributes some of that shift to the success of the Pension Protection Act of 2006, which allowed plan sponsors to default participants into TDFs, as well as other, more tailored, investment options such as balanced and life cycle funds and managed accounts.

Personal Focus

Nearly 20 years later, Cohen says much of John Hancock’s focus is looking for ways to “provide more dynamic income generating solutions for participants to utilize to achieve their retirement goals,” he says. “Every participant’s journey from accumulation to decumulation is unique, and life events do happen and may require a more dynamic solution where participants can better understand how their personalized investment choices impact their retirement saving goals.”

McCarthy of Morgan Stanley agrees that retirement income solutions are a big focus for the industry right now, as plan sponsors, consultants and asset managers work to provide a transition from accumulation of assets to decumulation. These and other innovations, however, will require coordination among competitors to succeed.

“Collaboration across the DC ecosystem with plan sponsors, consultants, asset managers, recordkeepers, etc. will continue to be of critical focus to ensure success in these personalized strategies,” McCarthy says. “Specifically, they will need to provide a seamless participant experience and robust integrated investment solutions.”

Russell’s Bandow and team are also watching less prevalent personalized TDFs, which seek to draw on more participant data points to cater the glide path. PIMCO worked with Morningstar to launch myTDF in 2021 and has continued to evolve the offering. Bandow says that, while such products are interesting, there is a struggle for now to get them onto recordkeeping platforms.

Those providers, he notes, are often focused on managed account products they are offering through revenue-sharing partnerships or their own proprietary products. If they add another product, such as a personalized TDF “that doesn’t pay them anything, they’re not going to be as excited to get that plumbing in place to make it work,” he says.

He does see artificial intelligence as potentially pushing all types of personalized solutions forward, both by mining data and by identifying participant patterns to create better outcomes and bring down pricing, he believes.

“I don’t know how far in the future this will be,” he says. “I don’t think it will be next year, but it may be within the next 10 years. … We could get there quicker than we may think.”