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Personalised TDFs on the rise

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The newest trend in 401(k) plans is launching personalised versions of target-date funds (TDFs). “For now we are seeing personalised TDFs being introduced by market players who are looking for a way to compete with the more traditional, established market participants,” says Neil Lloyd, head of US DC and financial wellness research at Mercer

“But we are aware that the larger, established players are monitoring these developments. If the personalisation TDF idea catches on we would expect to see the more established players embrace them.  In a similar way to robo-advice, where today the two robo-advisers with the largest assets under management are with Vanguard and Schwab.”

TDFs are a popular default investment for the vast majority of 401(k) plans in the US. They attract about 50 cents of every dollar that flows into employer-sponsored retirement plans and hold about $1.7trn (€1.5trn) in assets.

“TDFs are designed for the ‘typical’ participant with a ‘typical’ investment profile, where age is the only factor used for portfolio selection, and their asset allocations do not take each participant’s market experience into consideration,” says Andrew Scherer, senior director of DC business at Russell investments, one of the first firms to experiment with this idea of personalised TDFs. Russell has already $300m in its Personalised Retirement Accounts (PRAs), launched in 2014. “With PRAs, participants are not tied to the one-size-fits-all strategy of target-date funds,” says Scherer. 

PRAs collect information about each participant from the record-keepers and plan sponsors to build a customised portfolio using personal attributes (age, salary, account balance, savings rate, gender), Russell Investments’ capital markets forecasts, and the investment options in the plan’s core menu. Then PRAs automatically adjust and manage the portfolio as the participants’ circumstances or the capital markets change; and they include the personalised retirement planner to help participants keep track of their progress toward their retirement income goal.

Andrew Scherer

Another Pioneer in this field is Empower Retirement, the second-largest retirement plan record-keeper by total participants (9m) in the US, which administers $590bn in assets through 39,000 retirement plans. In 2017 Empower launched Dynamic Retirement Manager (DRM) that currently has 250 clients with about $2bn under management. 

“DRM is a qualified default investment alternative (QDIA) designed to help plan participants whose needs change over time,” says Stephen Gawlik, vice-president for corporate affairs at Empower. “This product directs the participant’s retirement deferrals into a competitive investment option, such as a TDF, in her/his early years of working. Later on, when a pre-determined set of criteria are triggered (such as age of the investor), the participant’s assets will automatically shift into a managed account. This offers the opportunity to receive a customised, personalised retirement income strategy as the participant begins to focus on the transition into retirement.” 

In March, Edmund Murphy, Empower Retirement president and CEO, announced another product, Advisor Managed Accounts (AMA), in partnership with the advisory firms SageView Advisory Group, Mesirow Financial Retirement Planning and Advisory, and Resources Investment Advisors. The adviser firm acts as a fiduciary to the participants for the service, so it is responsible for the portfolio construction and maintenance, while Empower provides a newly redesigned advisory services technology platform and client experience.

These new personalised TDFs or managed accounts usually charge advisory fees that could look like a problem while the asset management industry trend is going towards zero fees. “There is definitely a trend towards lower cost for commoditised investments, especially for ETFs that track some kind of market index, but I think you can still have premium pricing for things that are personalised,” says David Blanchett, head of retirement research at Morningstar. 

However, the problem may be a different one, according to Mercer’s Lloyd. “We are finding when we discuss the personalisation theme, of which the personalised TDFs is only one example, we see a lot of ‘head nodding’ and interest in the topic, people do relate to the idea. But for a number of reasons, including the litigious environment, the retirement market is one which can be slow to innovate and adopt new trends, and there is a feeling of safety from investing in a large target-date fund.” 

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