Products October 27, 2023

Vanguard Target Date Retirement Fund Series Turns 20

The low-cost investment vehicle has come to dominate retirement plan savings, but industry voices are calling for more personalization.

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On October 27, 2003, the Vanguard Group debuted its first retirement target-date fund series.

20 years later, the low-cost, index-based asset manager now accounts for 37% of the $1.58 trillion TDF market among the largest 10 providers, according to the latest data from Simfund, which, like PLANADVISER, is owned by Institutional Shareholder Services Inc.

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Its closest competitor, Fidelity Investments, comes in at 21%, followed by American Funds (16%), T. Rowe Price (10%) and TIAA (5%).

Vanguard’s success has come, in part, due to the popularity of a “set it and forget it” investment that can be used in retirement plans to adjust the risk profile based on a participant’s age.

“20 years ago, Vanguard brought our low-cost, index-based approach to target-date funds. The impact has been profound,” says John James, the managing director of Vanguard’s institutional investor group. “Target-date funds have become a cornerstone of U.S. retirement plans.”

TDF growth started out slow.According to Simfund’s tracking, the largest providers had $123 million in TDF assets in their infancy in 1990. By 2003, when Vanguard launched its TDF series, the market had ballooned to $26 billion. It was spurred further along when the Pension Protection Act of 2006 made TDFs available for use as a qualified default investment alternative in retirement plans. A decade later, TDF assets had surpassed $500 billion, and by 2017, they topped $1 trillion.

According to Vanguard’s own America Saves research, 96% of retirement plans managed by the firm offered target-date funds, as of the end of 2022.

“Accessible and affordable target-date funds streamline asset allocation, diversification and rebalancing, while personalized advice helps investors stay on track toward multiple goals,” James says.

Getting Personal

But while TDFs have grown in the retirement sector, so have calls for more personalized investment and advice options for participants to cater outcomes beyond an age-based glide path.

Managed accounts, which provide individualized investing and advice, are growing both in size and interest, as plan sponsors and advisers seek to provide a personalized option for participants at volume, according to a report released this week by Cerulli Associates and managed account provider Edelman Financial Engines.

More than half (52%) of consultant-intermediated defined contribution plans offer managed accounts, according to Cerulli. Among that set, 5% use it as part of a dynamic qualified default investment alternative, which means participants are transitioned into a managed account later in their career, and 3% use it as the plan QDIA.

Meanwhile, TDF options themselves are being built to be more personalized. There are numerous customized TDF options that can cater to plan sponsors and their participant pool. In 2021, PIMCO announced a collaboration with Morningstar Inc. for TDFs that include age, salary, assets, savings rate and company match rate to create more personalized allocation. In 2022, Capital Group, which runs American Funds, and Morningstar, announced Target Date Plus, a personalized TDF series with allocation advice tailored to a retirement saver’s specific needs and objectives.

Ron Surz, a frequent retirement commentator and creator of his own TDF solutions, believes the investment vehicle is a good idea that “has been cannibalized for profit” by what he sees as an oligopoly of providers.

“My biggest concern is the lack of protection against Sequence of Return Risk,” says Surz, referring to the risk of negative market returns when close to or in retirement.

Surz says TDFs at his Target Date Solutions, along with those of Dimensional Fund Advisors and the Thrift Savings Plan, protect the account balance at the target date by putting the majority of investment in Treasury inflation-protected securities.

He believes, and has written a book saying, that Baby Boomers are at risk of losing a major chunk of their retirement assets should a market crash similar to the financial crisis of 2008 hit, due to the amount of their savings held in TDFs. “They are going to spend this decade in the risk zone,” Surz says. “Hopefully it doesn’t happen, but the possibility is there.”

In terms of personalization, Surz recently launched his Soteria Personalized Target Date Accounts, which allows an individual to choose between three different glide paths. Participants can adjust those paths depending on their circumstances, along with being able to change their planned retirement date.

He envisions Soteria, named after a Greek goddess of safety, as a tool advisers and recordkeepers can also build from the best funds available in the market, as opposed to proprietary offerings.

Evolving Market

James of Vanguard agrees with the personalization shift, noting the approach depends on participant need.

“Retirement plans are evolving toward offering more personalization,” he says. “This is an important development, particularly for highly engaged retirement savers or investors working toward multiple financial goals. Target-date funds offer investors a hands-off approach that appeals to many retirement savers. On the other end of the personalization spectrum, highly customized advice from a robo-adviser or a CFP may be a better fit for investors seeking more support. We see the industry steadily expanding choices for investors along this continuum of personalization.”

By the end of 2022, he notes, more than three in four participants in Vanguard-managed plans had access to managed account advice.

Even among calls for personalization, TDFs show no signs of slowing down as the leading investment vehicle in retirement plans. As of the end of 2022, 96% of respondents offer TDFs, with 46% of all plan assets invested in TDFs, according to 119 plan sponsors surveyed by NEPC LLC.

The vehicle has also, according to Vanguard, both democratized investing and helped individuals avoid having to trade on their own or pay an adviser. The asset manager notes that the fraction of participants it serves holding broadly diversified portfolios rose from 42% in 2006 to 79% in 2022.

Meanwhile, 94% of participants in Vanguard-managed plans did not initiate any trades, the result of 15 years of declining self-activated trading, which the firm attributes in part to increased adoption of TDFs.

 

In Practice October 27, 2023

Security Benefit COO: There’s Potential for Advisers to Work More With Women

A benefits expert shares barriers that affect women’s decisions to create a financial plan or find an adviser.

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Women often feel like the amount of money they have is not worth creating a plan to manage or worth engaging a financial professional to help, according to Jackie Morales, chief operating officer at retirement and insurance firm Security Benefit Life Insurance Co.

But reality is much different from many women’s perspective, according to Morales, which makes them important clients—either existing or potential—for retirement planners. The operations head cites LIMRA research noting that among women who reported receiving financial advisement, 40% said they felt prepared for retirement, compared with 27% of women without an adviser.

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“Women think that advice is too expensive,” Morales says.

But that isn’t necessarily the reality, she says, and education around how advisers collect fees, whether based on pay for work or commissions, is important.

“Women want to have products and services explained to them,” Morales believes. “They want to have a relationship with their adviser and for that person to check in regularly with them, whether it’s a female adviser or a male adviser.”

In recent research from IRALogix, women are actually more likely to work with an adviser as compared to men, at a rate of 59% versus 50%. Women also rely more on other resources to learn about investing than men, whether it be podcasts (44% vs. 27%), books (40% vs. 26%) or workplace programs (25% vs.15%), the researchers found.

This backs up Morales’ belief that there is significant opportunity in retirement planning and wealth management to reach female clients.

And that opportunity may be growing in terms of assets to advice on. Citing research from McKinsey & Co., Morales says by 2030, women are predicted to control much of the $30 trillion in financial assets that Baby Boomers will possess.

Yet women are still hesitant in creating a financial plan or seeking out a professional, according to Morales. Research from Morgan Stanley notes that 70% of widows fire their adviser in the first year after losing their partner. To combat that trend, advisers should be working with both partners.

Morales sees retirement income vehicles like annuities as potentially useful for women.

“There are many women that are the primary household income earners, and if something were to happen to them, that’s where annuities play a part, but also life insurance plays a part,” she says. “How are you creating that replacement of income if you are lost? How do you provide for the family?”

Ultimately, in Morales’ view, the biggest concern that women have about retirement planning and financial planning are the same as men’s: dignity in retirement.

“People want to know that they will have enough money when they retire, that they can live the life they want to live and not live with a fear of outliving their assets,” she says. “That’s a real concern.”

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