A Decade After PPA and the QDIA Debate Continues

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.

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.”