PD08: Multiple Choice: Target-Date, Risk-Based or Managed Account?

Plan sponsors must navigate the available options to find the plan investments best suited to their participants' needs while also being aware of the associated risks and their fiduciary responsibilities.
By PS

Todd Lacey, Managing Director of (k)larity Group, told attendees at PLANSPONSOR ‘s Plan Designs Conference in Chicago, that up to 85% of participants who choose to manage their own portfolios rather than invest in a target-date fund would have benefited from having someone else take care of it for them.


align=”center”> The Panel Audio File


He went on to outline several “do it for you” investment options-asset allocation funds such as target-date funds and managed accounts-as potentially beneficial for both sponsors and their participants.

Weighing the Alternatives

The variety of plan sizes and circumstances-size itself also being subjected to many variables, including rate of participation, average account balance, total number of pre- and post-retirement clients, among others-makes it impossible to suggest one type of approach for all sponsors.

Managed accounts can be cost-effective if the manager is capable of producing alpha or preventing a client who is especially prone to poor investments from making more bad decisions or buying high and selling low, as some do when under pressure. They work best when closely based on the participant’s assumed preferences and require more continued involvement than a target-date fund.

Target-date and risk-based funds, while not likely to produce as much alpha as a well-run managed account, can be an easy, effective, and less expensive option for many plan sponsors. It is important that plan sponsors know what their participants are ready for.

If plan sponsors want participants to retire happily-and not be inclined to sue the people who got them there-their goal should be to ensure that the plan is creating adequate retirement security for the employee population.

“That is, at the end of the day, what matters,” said Christopher Jones, Chief Investment Officer at Financial Engines.

Chris Herman, VP Director of Retirement Solutions at Old Mutual, raised some important considerations for plan sponsors who are looking at target-date funds: first, they must explore the risks and the underlying asset allocation.

Herman said sponsors should also know who is selecting the underlying managers within a particular fund and if the decision is proprietary or independent, and whether the fund is based on a "best in class" collection of investment managers or one individual's products.

Jones emphasized the analysis of target-fund "glide paths" (see Moving Target )-the shift in underlying fund allocations as target dates progress. Jim Danaher, Senior Product Manager of Defined Contribution Solutions at Northern Trust, cautioned sponsors to make sure glide paths are validated to prove that they can provide substantial income replacement during retirement.

- Sara Kelly

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