Is It (Finally) Finally Time?

Two headlines on NAPA Net caught my eye this past weekend—provocative “what if” type questions.

I’m talking about “Will Retirement Income Solutions Finally Break Through in 2024?” and “Will Managed Accounts (Finally) Take Hold as QDIAs?” Both, of course, included the word “finally” in the title(s)—no doubt because the underlying premise has been touted in previous years, but (mostly) come to naught.  And yet even now, both were basically based on predictions of organizations/individuals that have—as my friend John Sullivan put it—“a dog in the fight.”

More specifically, the former finds heightened plan sponsor interest expressed (in an annuity-friendly trade survey)—and provisions in the original SECURE Act. And the latter finds a similar level of interest by plan sponsors in trading out target-date funds as QDIAs for managed accounts—on a premise that fees in the latter will decline and that recordkeepers will be able—and plan participants willing—to incorporate more personalization in their models.[i]      

Not that having a vested interest in the outcome precludes one from accurately assessing future trends—though it seems prudent to accept those particular forecasts with a grain of salt. Indeed, one might argue that the current disappointment in adoption—and take-up rates—of these programs is, at least to some degree inspired by what often seems the unbridled optimism of firms/organizations on those prospects reported as a fait accompli!

Don’t get me wrong; there’s little argument that both developments could represent a significant enhancement in the retirement prospects of 401(k) savers—if properly designed, priced and implemented. 

All of which leaves the industry at large proclaiming the need for these “evolutions”—and yet scratching our collective heads wondering why the take-up rates are so…disappointing. Now, you can’t really be surprised that product advocates are inclined to see a bright future for their wares—indeed, predicting an "expansion" of interest seems like a no-brainer (particularly if one demurs on a specific definition as to how much). But let’s be honest; plan sponsors will NOT be sued for not offering retirement income—there is, quite simply, no legal obligation to do so. On the other hand, managed accounts that aren’t truly personalized will—and have—been sued for costs that exceed allegedly comparable target-date fund options.     

Indeed, where things often fall apart lies in the reality department in those details—or in skepticism about the realities of those details. Retirement income as a concept is a laudable goal of retirement plans—but concerns remain about the efficacy of the solution, not to mention its cost and portability.  Ditto managed accounts which, in any number of situations, appear to be little more than an expensive target-date fund—so much so that advisor-respondents to the 2023 NAPA Summit Insider characterized them as a negative game changer. 

That said, and to the premise of the articles cited above, this is not the first time that those bright futures have been predicted.[ii] There are, of course, any number of reasons/rationalizations for those past disappointments—but I’m not sure this time will actually be any different (feel free to push back in the comments section). More's the pity because I think your average participant could surely use help on these fronts.

Let’s face it; TDFs were "easy" (arguably easier than they should be)—and they solved a here-and-now problem. Retirement income remains "hard"—and (eventually) solves a problem for workers, but not plan sponsors. Quite the opposite—as it creates difficulty for the plan sponsor in the here-and-now. There's progress on that front, for sure—but likely not (yet) enough to matter. 

As for managed accounts—it seems to me their prospects rely on two developments: (1) plan sponsor willingness to replace their TDF QDIAs with managed accounts (and that’s by no means certain, despite Wilshire’s enthusiasm); or (2) the realization of the personalization promise of those options. At that latter point, it would seem to speak not only to the expressed need of participants, but to the ability for plan fiduciaries to provide more than the “blunt instrument” of a target-date fund. What remains to be seen is if plan fiduciaries will be willing to trade en masse the “comfort” of the pack’s TDF adoption for the variability of truly individualized portfolio management in a default option?     

What It Will Take

Despite what may seem pessimism on those prospects, I think the key to shifting the needle of adoption against those impediments will require that plan sponsors who HAVE made those adoption decisions be willing to talk about it. Consider IBM’s recent announcement regarding trading off its matching 401(k) contribution for an employer cash balance contribution. While it’s an innovative shift, it’s not likely to be widely adopted—and yet for weeks after that one plan sponsor announcement, the industry was all a buzz for the possibilities…of a return to defined benefit plan designs. 

So, if you are—or have—a plan sponsor client that has embraced, adopted (and hopefully implemented) a vibrant, highly personalized managed account solution—or a retirement income option for participants on the menu—we want, no need, to hear from you. We need to know that it’s more than just a good idea; we (all) need confirmation that it’s practical, efficient and appreciated. 

Failing that, we’re likely to continue to wonder if it’s (finally) finally time…again.

  - Nevin E. Adams, JD

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[i] The trends report here also envisions an uptick in interest in retirement income options.

[ii] It might help to set (more) realistic expectations. Rather than these periodic surveys/reports which “transform” mere expressions of interest into presumptive action, we need to acknowledge (as most of us do, at least in person) that these are complicated decisions—and decisions that are being made in the midst of a highly litigious environment.