Next Generation of Asset-Allocation Strategies

Although defined contribution (DC) plan assets have largely flowed to target-date funds (TDFs) in recent years, many advisers prefer customized solutions for their retirement plan clients and have begun looking for accessible solutions for their mid-size plan sponsor clients, generally those with $15 million in assets under management (AUM) or more. Seeing demand for strategies that offer customized glidepaths at a lower cost than a fully managed account product, while still providing opportunity for advisers to retain their critical value to sponsors, forward-thinking providers such as MassMutual are beginning to broaden their offerings. Alison Cooke Mintzer, editor-in-chief of PLANADVISER, talked to Tina Wilson, vice president and head of product development and research for MassMutual’s Retirement Services Division, about innovation in the development of asset-allocation strategies and how advisers can use these strategies to build their businesses.

PA: What trends are you seeing in the marketplace around asset allocation?

Wilson: We have seen a lot of interest, especially from advisers, in asset-allocation solutions that offer customization, specifically the ability to use funds that you can’t use typically in a target-date fund, such as the ability to add stable value products and alternative investments. As we strive to ensure plans have the information, the plan design, the tools and the investments that participants need to be retirement ready, we are encouraging advisers to take a closer look at their retirement plan clients and their plan demographics: whether a company has a defined benefit (DB) plan, whether participants are invested in company stock, the age of the participant population and other factors.

We also continue to see the critical role of the adviser in the due diligence and benchmarking of the retirement plan, and see advisers’ need for solutions that complement their businesses and offer growth opportunities for their practices.

PA: Tell me about the managed allocations product you recently released.

Wilson: In recognition of the need we are seeing in the marketplace, we’ve just introduced MassMutual Managed Allocations^SM, powered by BlackRock^®, which offers the convenience of prepackaged target-date funds whereby participants select an investment based on when they plan to begin withdrawal of funds for retirement. This product allows for customization of a target-date strategy based on the funds available in the DC plan. The strategy uses the plan’s existing investment options—selected either through the plan’s adviser or its fiduciary—in such a way where then BlackRock serves as an ERISA 3(38) fiduciary* to the glidepath to give the plan, and ultimately its participants, a custom target-date suite. For this service, participants are charged an annual fee. There are three versions of this glidepath, and the choice is recommended by the plan’s adviser: a more conservative, a moderate and a more aggressive version. We have materials to help the adviser and the plan fiduciary determine which might be the most suitable for them based on plan demographics.

All MassMutual Managed Allocations^SM, powered by BlackRock^®, have a “to“ glidepath, meaning all of them become their most conservative as the strategy reaches the target retirement date.

PA: MassMutual already offers both packaged TDF solutions and custom products. Why add this to the mix?

Wilson: We increasingly saw advisers who wanted to participate in the custom allocation program for a plan’s target-date or qualified default investment alternative (QDIA) solution, but because of either their own fiduciary constraints or their firms’ constraints, they couldn’t. They were limited to packaged target-date funds, which are appropriate for many plans, but some advisers and plan sponsors would prefer to have and would be better served by a customized asset allocation model.

For the last six years, we’ve had complete custom capabilities for advisers, and we call that program CustomChoice Strategies^SM. We needed something that allowed non-fiduciary advisers to participate as well. This solution highlights the value of the adviser, but ultimately gives the plan and its participants a target-date strategy based on the funds that plan fiduciaries have already selected and on which they perform due diligence regularly.

There are benefits to a customized strategy for both the adviser and plan sponsor. One of the benefits of customization over prepackaged target-date funds is you can use alternative investments in the strategy that are not generally available within a prepackaged target-date fund. A stable value option is one example.

The other real benefit to customization is that it can take advantage of many different investment managers, investment strategies and styles—both active and passive. You can have many fund companies represented in your portfolio, as sponsors do on their core lineup.

One reason we like working with BlackRock is it sees the value of using alternative investments, so the plan sponsor and adviser can choose to include optional asset classes such as Treasury inflation-protected securities (TIPS), real estate, and commodities in the glidepath—any one or a combination of them. Many of the custom or semi-custom glidepaths out there don’t allow the use of alternative investments.

For plans that want to use investment options unavailable in off-the-shelf target-date funds, this can be an option to consider. Our philosophy is there’s no one product or solution right for everyone. It’s a matter of determining what makes the most sense for that plan and its participants, and then building out that solution, so this certainly is in no way intended as an abandonment of off-the-shelf target-date solutions. We offer a number of strong-performing target-date funds, including our own, so this is just another potential solution for advisers to consider.

Whether plans use prepackaged or customized target-date funds, it’s important to remember values are never guaranteed and may not provide adequate income at or through retirement. Risks are subject to the underlying funds selected and include, among other risks, credit quality, geography, liquidity and duration. Investors need to read the underlying prospectuses for details.

PA: What is the role of the retirement plan adviser with this product?

Wilson: We believe advisers play a key role in the entire process; they still work with the sponsor in selecting the appropriate funds for their plans. The adviser works with the sponsor to ensure an appropriate fund lineup, but also to help decide which glidepath—the conservative, moderate or aggressive—is most suitable  for that plan and its participants.

PA: How do you anticipate this product developing over time?

Wilson: The product will evolve. While today’s product allows allocation strategies based on the funds available in the plan today, we have future iterations and enhancements planned that will let plan sponsors integrate funds outside the core plan offering. From a recordkeeping standpoint, we can recordkeep a myriad of funds, so that gives us tremendous flexibility as to the tools the adviser and his sponsor can make available.

We also intend to build this solution out with other investment managers that have a specific focus on target-date and glidepath management. BlackRock has a wonderful philosophy and tremendous expertise around glidepath design, but it is unique to BlackRock. We hope to balance our offering with a number of firms that might have an alternate view on glidepath management.

What’s key to us is to partner with firms that truly have the resources, the expertise, the commitment and the research around asset allocation and specifically around glidepaths. 

*An ERISA section 3(38) investment manager is a fiduciary who has the power to manage, acquire or dispose of plan assets.  For Managed Allocations, BlackRock serves as an ERISA 3(38) investment manager solely for purposes of glidepath construction and management.

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MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.

 

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