PANC 2016: Refining the Fund Lineup

Target-date funds have done a wonderful job of getting participants’ portfolios diversified, but managed accounts, which are tailored to an individual’s personal situation, can do an even better job. This was the consensus of panelists on “Refining the Fund Lineup” at the 2016 PLANADVISER National Conference.

“Target-date funds (TDFs) have been a great benefit for participants to diversify, as people have never understood asset allocation,” said Tim McCabe, senior vice president and national sales director, retirement, at Stadion Money Management. Since first being offered, TDFs now have “to” and “through” retirement glidepaths, as well as emerging market and international exposure—and these are welcome developments, McCabe said. However, because TDFs are not transparent when it comes to their actual holdings, it is “hard to evaluate their risks,” McCabe said.

“TDF investors have done well because of diversification and the fact they tend to remain invested in the funds—but each TDF is completely different,” agreed Ryan Mullen, senior managing director, national sales, for MFS Fund Distributors, Inc.

Looking forward, retirement plan advisers should begin to embrace managed accounts, the speakers said. “Moving from ‘do it yourself’ to target-date funds, TDFs have been a wonderful first step” to getting participants’ portfolios to become diversified “but they are built around the average employee,” McCabe said. “People have different risks and savings patterns, and managed accounts are specific to each participant’s holistic situation. They actually personalize the investments and require the investment manager to act as a fiduciary in the participant’s best interest. In addition, they invest 100% of the assets in the fund. While there is no substitute for an adviser sitting down with a participant, that is just not scalable.”

In addition, managed accounts could potentially offer higher returns in this low-return environment, Mullen said. “You need to ask yourself what you are doing to drive additional alpha,” he said. “Lowering fees helps, but it doesn’t drive alpha.”

Furthermore, advisers need to ensure that people are saving enough and should embrace automatic escalation, said Clint Barker, senior vice president of product strategy and national accounts at Prudential Investments. However, he believes that managed accounts should only be offered to a more sophisticated participant base.