It was not all that long ago that investors automatically enrolled into retirement plans were almost exclusively placed in stable value funds, or perhaps money market funds—investment approaches deemed to be safe and prudent for any of the small number of people actually defaulted into retirement plans pre-PPA.
Today, nearly a decade after passage of major reforms in the Pension Protection Act (PPA), the steady stream of highly customizable products and services targeted at automatically enrolled defined contribution plan participants tells a different story. A wide variety of investment providers—from the most passively minded indexing specialists to more daring tactical managers—compete for the coveted qualified default investment alternative (QDIA) slot on retirement plan menus. The firms offer a huge variety of philosophies about what approach is best for “auto-participants.”
This is the background for Stadion Money Management’s new “StoryLine” product launch, which the firm bills as a next generation approach to the QDIA. Similar to some other providers unveiling adviser-intermediary managed account strategies based on exchange-traded fund (ETF) vehicles, Stadion is clearly doubling down on the concept that efficiently priced customization is the future of retirement plan sales, and not just in the large- and mega- plan markets.
Speaking with PLANSPONSOR about the StoryLine approach, Stadion Senior Vice President and National Sales Manager Tim McCabe suggested the product strives to take the best of both target-date funds (TDFs) and managed accounts, while achieving price efficiency and defensively minded trading flexibility through use of ETFs.
“The StoryLine process first seeks insight into the overall plan makeup with the intent of tailoring default options for each plan sponsor,” he explains. “Then, with Station’s participant-centric web interface, employees are encouraged to further define their individual investment paths based on personal risk profiles, expectations and goals. In addition to this, StoryLine will allow, at the employee’s discretion, the inclusion of outside and spousal assets to facilitate more comprehensive retirement planning.”
NEXT: More and more customization
In effect both the plan sponsor and participant are asked for input to customize the glide path instituted for a given individual in the plan’s QDIA.
“The flexibility and price efficiency of ETFs are important here because, unlike traditional managed accounts based on mutual funds trading in and out of a single portfolio, our approach is actually built around a large number of preset ETF portfolios that run the gambit on risk exposures,” says Jud Doherty, president and CEO of Stadion. He explains that a participant is initially placed into one of the many potential portfolios based on their input on the risk questionnaire and the current market environment.
“As the participant ages or the fundamental market situation changes, or as their outside asset situation evolves, their appropriate risk exposure may also change and so the participant will be automatically routed into the new portfolio,” Doherty says.
Clearly not your granddad’s QDIA, adds Nick Good, chief operating officer of the U.S. Intermediary Business at State Street Global Advisors, a firm already well-known in the U.S. defined contribution plan market and which will provide the underlying SPDR ETFs for StoryLine. He notes that one clear differentiator for Stadion from other firms fighting the pitched QDIA battle with ETF-based managed accounts is that StoryLine is being made available to plans well below $20 million. That’s the lower asset limit of a somewhat similar adviser-mediated Schwab product launched in 2015, for example.
“Participants in the nation's smallest 401(k) plans have been overlooked by the retirement industry because there hasn't been an efficient way to deliver customized advice down to the plan participant level in micro and small plans," McCabe feels. “It's well known that more than 90% of retirement plans have assets of less than $5 million, which to me means there's an awful lot of Americans saving for retirement without advice, direction, or perhaps even access to the most appropriate investment vehicles. The end goal of this next generation of the QDIA is to have each participant on a path personalized to their own circumstances and needs.”
NEXT: ‘Halo’ benefits for plans
For plan sponsors, the leadership at Stadion and State Street also predict “halo benefits from StoryLine,” such as advanced new behavioral finance and communication tools to help deepen their relationships with advisers and participants alike.
Good, McCabe and Doherty all feel the “next chapter in retirement solutions must be built to help each individual participant determine where they want to go, and what they must do to get there, all within a glide path framework that moves beyond oversimplified age-basing.”
“Being the same age doesn't mean two participants necessarily have identical risk profiles, assets, savings habits, or financial pictures,” Good observes.
“As with technology, in investment management, if you're not disrupting the market through innovation, you're not doing your job,” Doherty concludes. "Target-date funds remain the de facto default option, but it's just unrealistic to assume one glide path works for everyone. We believe our personalized sponsor and participant glide paths, built using low cost ETFs with a defensive bias, are the next generation of participant investing in the small market.”
More information about the new product launch is here.