Defined contribution retirement plan sponsors seeking to help participants make suitable investment decisions and execute those decisions efficiently over time often turn to automated solutions.
Providing a cost-efficient, customized approach, automated investment solutions act as a powerful mechanism for sponsors, says Jeremy Hersch, vice president, head of asset allocation services, Transamerica Retirement Solutions. Built on the plan’s core investment menu, they ultimately enhance flexibility, transparency and control for sponsors, he contends. Sponsors are better off because they are presented with the opportunity to focus on other critical elements of plan design and communications.
Participants benefit from automated investing solutions as well. While retirement investing decisions can be complex for individuals, automated solutions make it easier to implement a diversified combination of the plan’s investments. These investments are automatically rebalanced, reducing the amount of time and effort on behalf of the participant. Additionally, Hersch says this can help overcome the inertia that tends to prevent people from doing things like rebalancing and reducing risk over time.
“Automated investment solutions simplify the process for participants, giving them confidence in what is otherwise an intimidating situation,” says Hersch. “With regular and transparent reporting, automated solutions also create awareness of each individual’s investment stance at any point in time and reassurance that they’re following a sound investment approach.”
The main challenge posed by automated solutions is to understand the capabilities of the services offered by retirement plan providers and evaluating the extent to which those meet the needs and goals of the plan sponsor.
The marketplace displays several approaches to automated investment, including the popular target-date structure, in use at 70% of defined contribution (DC) plans, according to the 2014 PLANSPONSOR Defined Contribution Survey. Transamerica conducted a study analyzing approximately two million plan participants in more than 1,400 DC plans offering an automated service built on its custom target-date technology platform. The study revealed that for a three-year period ending December 31, 2013, the distribution of the personalized rate of return for do-it-yourself (DIY) investors showed a concentration between approximately 35% and 50%, with a peak around 42%. In contrast, the distribution for participants using the custom target-date solution showed returns between approximately 40% and 55%, with a peak around 50%.
The median return for automated investment solution participants outperformed DIY participants by approximately 11.7%. Further, only 0.8% of participants using automated services earned a rate of return at or below 15%. That number jumps to 28.2% for DIY participants, meaning participants were more than 37 times more likely to have returns at or below this level when using a DIY strategy.
However, when considering investment options, what meets the needs for one plan sponsor may not be sufficient for another. Jeff Eng, director of retirement income solutions at Russell Investments, explains that while his company believes in target-date funds, they understand that certain plan sponsors want a more personalized investment strategy for their participants. For those sponsors, Russell offers Adaptive Retirement Accounts (ARAs) to enhance personalization. Built from a retirement plan’s existing fund menu, ARAs leverage recordkeeping data to implement features such as automatic portfolio rebalancing, personalized glide path development, real-time retirement readiness reporting, and other digital solutions to service a large number of participants.
“The automated support available through the ARAs means each participant gets a personalized allocation and glide path based on their individual retirement readiness outlook, as contained in their recordkeeping data,” adds Dirk Quayle, president of NextCapital.
Another advocate of the automated approach, Graystone Consulting discloses how the use of automated solutions led one plan sponsor to see a participation rate increase from 47% to 98.76%. The 2015 Retirement Plan Adviser Team of the Year says it advises many organizations not only to automatically enroll all eligible employees into TDFs but also initiate re-reenrollments into TDFs.
Hersch cautions these solutions are not a silver bullet, as improving participant outcomes is driven not only by a well-conceived and executed investment strategy but also by a sufficient savings rate and the discipline to stick with a long-term approach.
However, he concedes, “Beyond achieving potentially higher and more consistent account performance, there are intangible benefits from the comfort they bring and the time they free up to focus on other important decisions. Automated investment services can provide an extra boost for participants, in both their confidence and their accounts, and responsibility lies with the sponsor to access the powerful mechanism.”
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