Made To Order
Making sense of asset allocation choices
In my 30 years working with employer-sponsored retirement plans, I am hard-pressed to call to mind a product innovation that has been adopted with as much vigor as the current generation of target-date funds—and with good reason.
Their availability provides a ready solution to what, for many participants, remains the single biggest obstacle to retirement plan savings: making investment choices. Moreover, they offer participants the opportunity to have that asset allocation not only be determined by investment professionals, but also be professionally rebalanced on a regular basis by those same professionals. Frankly, even the most active and engaged participant-investors frequently lack the time, expertise, or discipline to keep a regular eye on their asset allocations.
For plan sponsors, of course, there is the added incentive/benefit associated with the utilization of these vehicles as a qualified default investment alternative (QDIA) in situations, such as automatic enrollment, where a participant investment election is not provided. That said, there remain a wide variety of these choices available, with different fees, operating structures, and glide paths (for more information on that, see "Below the Surface, page 42).
Of course, you may have offered your participants access to an asset-allocation solution for some time now—perhaps via lifestyle funds or, as they are frequently called now, "risk-based" funds, as well as target-date funds or, as you may still refer to them, lifecycle funds. Still others may use a "managed account" solution, put together by your financial adviser or, in some cases, by your defined contribution provider—frequently from funds already present on your investment menu.
This month's Know How speaks to those three basic types of asset-allocation choices, and is designed to help you explain to your participants the differences among them. Personal financial writers tend to treat them interchangeably and, to some extent, they perform much the same service.
Where they differ is, of course, of significance to you as a plan fiduciary and to your plan participants who are seeking to avail themselves of the insights of professional money managers.
You can find out more about specific fund options in the Asset Allocation Fund Buyer's Guide presented in this issue. As always, we appreciate your thoughts and look forward to your feedback. —Nevin E. Adams, JD