Wilshire: Personalized Investing Is Future of DC Plans

The future of defined contribution investing is poised for a major shift toward personalized solutions, ranging from more customized target-date funds to managed accounts to model portfolios for retirement savers, according to a white paper by Wilshire.

“An adviser’s next best wealth client will be found in the workplace,” Brian Thomas, managing director at Wilshire, says via email about his paper, “The Future of DC: Personalized Investing.” “There is an opportunity [for advisers] to reach this prospective client far before an IRA rollover.”

Thomas notes that there are now multiple ways advisers can facilitate custom default investment models that are personalized at the plan level for participants of varied ages and needs. The next step, it seems, is for plan advisers, sponsors and asset managers to start leveraging them.

“Portfolios can be further personalized as participants engage with financial wellness tools or financial advisers to volunteer insights regarding their financial needs, plans and circumstances,” Thomas says. “This bridge to wealth can be put in place through careful alignment and integration between retirement plan advisory firms, recordkeepers and asset managers.”

Retirement plan recordkeepers’ ability to capture and integrate individual participant data is part of the catalyst for advancing portfolio personalization, according to the paper. Beyond age, those data points can include gender, account value, salary, bonus, retirement saving deferral and any employer match—even without direct participant engagement.

Hybrid Approach

The emergence of hybrid qualified default investment alternative solutions has been a significant development favoring personalization, according to the paper. These hybrids typically start with a participant in a TDF as the default, then transitions them into a more personalized managed account based on investor age and other factors.

“Differences among younger plan participants tend to be small, supporting the use of TDFs initially, whereas differences among older participants become comparatively much larger over time, particularly as investors enter their 50s and approach retirement,” Thomas wrote.

Personalization, however, will also come with more enhanced TDFs themselves in the form of custom TDFs, he wrote. By utilizing the same participant demographic information, a managed account chassis can fine-tune TDF assignment and allocation, resulting in a more tailored investment portfolio.

Model Portfolios, Adviser-Managed Accounts

Another area of personalization is coming with the introduction of QDIA model portfolios, which further blur the lines between TDFs and managed accounts, according to the study.

Unlike custom TDFs, QDIA model portfolios are not unitized, meaning they offer custom portfolios at the individual participant account level. This allows plan sponsors to choose pre-packaged glide paths tailored to their participants’ demographics and preferences. Importantly, QDIA model portfolios can be designed for each age cohort, the paper noted, so the vehicle can reflect the differences among participants, making QDIA model portfolios easier and less costly to implement than customized TDFs.

The white paper also highlighted adviser-managed accounts as a key development that can help advisers take a more hands-on approach to retirement saving. In this model, the traditional investment fiduciary’s role may shift to third-party consultants, investment advisers or plan sponsors. This approach, previously established in custom target-date funds, is expected to gain traction in managed accounts and QDIA model portfolios across plans of varying sizes.

The position of advisers as managers of participant data opens opportunities not only for directing participants into managed accounts, but also for highlighting rollover IRA opportunities with the adviser, the paper stated. This development aligns with the broader trend of moving from commission-based to fee-based advisory relationships.