With the introduction of “Target Date Plus” in partnership with Morningstar, American Funds has taken target date funds into their next logical phase of individual allocation based on five easily attainable data points.
All TDFs are managed accounts, except that most use only one data point—the expected retirement age. What has surprised many is that this crude but simple model has been thriving for so long with a massive 17% increase in assets in 2021.
“The industry started with risk-based funds,” said Brendan Mahoney, Head of Institutional Retirement Strategic Growth at Capital Group. “Target Debt Plus is the first individual investment that includes an individual’s age, salary, assets, savings rate and company matching rate to allocate individual asset allocations.” Mahoney noted that managed accounts use 19 data points. The TD Plus fee will be 4.5 bps higher than their off-the-shelf TDF – he hopes record-keepers can also add fees to offset communications and technical costs.
Looking back, TDFs got real traction after the Pension Protection Act of 2006, which provided a safe harbor for their use as a default option for auto-enrollment. They quickly faltered during the financial meltdown of 2009, which revealed that some of the 2010 series were filled with high-risk equities, resulting in a difference of more than 40 points between different providers within the same vintage. Additionally, some TDFs managed funds until “retirement age,” while others managed through “retirement” with wildly varying allocations.
Driven by cost, indexed TDFs led by Vanguard, BlackRock and State Street Global Advisors gained traction after hybrid funds using both active and index investments. Although many experts predicted that proprietary TDF would lose steam, the top three active managers, Fidelity, American Fund and T Rowe Price, would remain proprietary.
The fastest growing TDF, FlexPath, took the next step in mid-2010 and offered three versions based on risk for each vintage using multiple asset managers.
As managed accounts gain popularity, concerns about costs and whether young savers or those still building their next egg really need adaptation and whether the necessary data will be available from record keepers have increased. Barred from using most plans as their default. As costs come down and data becomes more available, plans are gradually deploying managed accounts as their QDIA.
There are two fundamental and existential defined contribution investment issues underscored by the acquisition of NextCapital, a managed account provider, by Goldman Sachs—privatization and retirement income.
Retirement income, where appropriate in TD Plus, is becoming more popular within TDF, but poses an interesting dilemma. The auto features work for the accumulation phase of retirement, but according to their co-creator, UCLA professor Shlomo Benartzi, they won’t work for the deaccumulation phase, which he claims requires participant engagement to personalize options. Is.
While we can agree with Benartzi, who recently launched his own app—PensionPlus—to address this issue, no one has figured out how to effectively and cost-effectively help participants. be added. Maybe there are ways to predict what people want when they retire, through their actions and profiles, that won’t require engagement.
Meanwhile, we should applaud American Funds and Morningstar not only because TD Plus is the clear and next stage of TD’s growth, but also because they are likely to be available on most of the major record keepers where the two firms have a deep relationship. Huh.
And while automated individual investing is becoming a reality for those saving for retirement, there is a move toward greater personalization with TDFs with TD Plus and eventually through managed accounts, to be addressed within DC plans. The next existential issue is providing guaranteed income in retirement. Likely to be more difficult and subtle.
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.