Managed Accounts — It’s Not (Just) the Allocation

 Managed accounts have been praised, criticized, and litigated — often on the theory that they’re little more than expensive target-date funds. However, a recent report actually quantifies their impact — and turns out, it’s not an investment story, it’s behavioral.

That report — inauspiciously titled “The 2026 Managed Accounts Research Series: Analyzing the Value of Managed Accounts” — was published in mid-January by Morningstar. Of course, Morningstar has a fair amount of “skin” in the managed account space — a reason, if you will, to find a favorable outcome for the design. 

And, sure enough, the analysis claims that managed accounts outperform target-date funds and the efforts of so-called “do-it-yourself” investors for — well, everyone. More specifically, the report claims that MAs increase the median wealth/salary ratio at age 65 by 5.9% for TDF investors and by 11.4% for DIY investors. Across all plan participants, adopting an MA led to an overall increase of 7.7%. Oh, and it does even better for younger participants, and lower-income individuals.

At this point, my natural cynicism kicked in — though based on my personal and significant experience working with Jack VanDerhei, one of the coauthors, over a period of decades during his long-standing tenure at the Employee Benefit Research Institute (EBRI) — well, let’s just say if Jack says something is “so,” I tend to believe him.

Following the report publication, I had an opportunity to talk with Jack (and Spencer Look, his collaborator in this effort) to better understand their model. For those who haven’t stumbled across the report, they take a significant database of actual 401(k) plan balances and activity and apply sophisticated statistical behavioral modeling techniques to project long-term outcomes based on various assumptions. While it’s not unusual for researchers to deploy statistical modelling, most suffer from a lack of actual data, not only as a baseline, but as a behavioral predictor. Which, I should add, explains (to me, anyway) why the results often don’t match up with how real people respond/react in the real world. 

All that said, this kind of modelling is also dependent on the quality of the underlying assumptions — and here none is perhaps more focused on than cost. Here the assumptions are 40 basis points cost for managed accounts (plus another 31 basis points in fund fees), 30 basis points for target-date funds, and 73 basis points for the DIY group.  Don’t like those assumptions? VanDerhei is willing to plug in different numbers.

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I also questioned whether it makes sense to model “managed accounts” generically, given the wide variation in personalization, design, and cost. Look explained that their review of roughly half a dozen managed account structures — including but not limited to Morningstar’s — showed sufficient similarity to support a generalized model. The same held true for target-date funds.

But here is the part that matters.

As important as factors like cost and asset allocation (not to mention the cost of asset allocation) are to outcomes, the report acknowledges that “…higher contribution rates are the primary driver.” The researchers further note that, “based on our analysis of the empirical data, MA users consistently save more than TDF or DIY investors, even after controlling for age, wage, tenure, and plan design features” — a pattern they say “…suggests that personalized savings-rate recommendations[i] embedded within MAs play a key role in encouraging higher savings rates.” 

While you have to go to page seven of the 19-page report to find that,[ii] to my eyes, it is the most important sentence in it.

Now, I’ve long said that while we talk about “managed accounts” as though they are a monolithic concept, they are not. There are different — in some cases, widely different — levels of personalization deployed — variations in cost and construct. Anyone who ignores these potential underlying differences in application is missing the point. 

I will admit that in considering the value of managed accounts, I had — perhaps as many of you — tended to focus more on the differences in asset allocation that might be possible if we knew more than projected retirement date — not to mention variation in the underlying costs. What I had not factored in was what the Morningstar researchers have — the application of personalization to influence and impact savings rates. 

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If managed accounts meaningfully increase savings rates — not just tweak allocations — that changes the fiduciary conversation entirely.

Because better investing matters. But saving more matters more.

• Nevin E. Adams, JD

 

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[i] It’s worth noting here that the impact is smaller, but still positive, for AE with escalation plans, with TDF investors seeing an increase of 2.7% and DIY investors seeing an increase of 7.8%. Moreover, approximately 92% of AE plans with auto-escalation show an improvement in the median projected retirement wealth for TDF investors under the MA scenario. In other words, while automated increases in salary deferrals help, those timed and personalized via the managed account platforms provide a superior result.

[ii] It IS, however, right there with the first findings. Apparently, the folks who created the executive summary didn’t view it as being as significant as I did.

'Inside' Straits

 A recent Wall Street Journal (WSJ) article asked what I view as a rhetorical question; “Do you really know what’s inside your 401(k)?” Rhetorical in that I suspect the answer from most people — certainly if they’re honest — is “no.”

Now there are many aspects to a 401(k) that bear scrutiny, but the article was focused on target-date funds (TDFs) — a mechanism that I think has been a boon for most of the novice investors (and savers) that I suspect most 401(k) participants (still) are.

You check one box (heck, these days that box is checked for you) and tap into the expertise — and ongoing expertise at that — of professional money managers to provide your retirement savings with a diversified portfolio mix. No longer do you have to concern yourself with weightings of stocks and bonds, value versus growth, domestic versus international — just leave it to the experts. 

But the WSJ article’s focus was a cautionary note — mostly concerned at the unexpected things that a collective investment trust (CIT) vehicle (now 52% of all TDF assets, according to the article) might open the door to — specifically alternative investments, notably so-called “private investments.” Which, the article points out, might undermine the cost advantages of the CIT with those alternative holdings that are more expensive, less transparent/readily valued, and illiquid.

Indeed, the author goes so far as to comment, “As far as the managers of private assets are concerned, the ‘target’ in target-date funds is you.” Of course, his concern is that the less rigorous reporting requirements of a CIT (compared to a mutual fund) would allow investors to be taken advantage of — as though they’re actually even skimming that mutual fund prospectus.

Let’s face it — target-date funds with all their simplicity (at least in the choosing) and promise have been pitched as a “do it for you” solution, and tens of millions of (too) busy, preoccupied participants have trusted their retirement savings to these vehicles assuming that the professional investment class — not to mention the plan sponsor fiduciaries that screened them — know what they’re doing.

Unfortunately, in some cases, that trust may have been misplaced.

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Something not mentioned in the WSJ article is that most of the manufacturers of those vehicles several years back embraced a “through” retirement date glide path, rather than the “to” retirement date that was the original “pitch.” The latter meaning that you’d gradually move to a much more conservative asset mix at your projected retirement date. And while there is still certainly a modest shift in that direction, the shift in emphasis means that I suspect there are a lot of folks nearing retirement that have a portfolio mix that is significantly more exposed to stocks than they might expect and/or want.[i]

Some of this shift is, doubtless, a sense that individuals want to stay invested in those funds, irrespective of retirement date.[ii] Some doubtless a desire to report better returns, since I suspect most fiduciaries are (still) paying more attention to the current returns than the conceptual integrity of the glidepath.

Regardless, it is, to my eyes, anyway, a shift from the original premise — and one that I suspect many participants haven’t noticed, and one on which plan fiduciaries may not have focused. The inclusion of alternative investments (particularly when folks are talking about 20% allocations) is one thing — but the structural glide path of these options, particularly when positioned as a default investment, strikes me as even more fundamental.

That said, and as the WSJ article closes, “None of this means you should turn your back on these funds, which can give you a powerful boost toward a sustainable retirement. It does mean you’ll need to know what you own and speak up if you don’t like it. The ultimate hands-off investment is going to require you to be a lot more hands-on.”

I would say that goes double for those responsible for the selection and monitoring of these plan options.

• Nevin E. Adams, JD

 

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[i] Note — not saying that the shift in glidepath focus isn’t legit, or even beneficial — it just seems that most folks probably missed that “memo.”

[ii] Cynics might even suggest that the shift is a function of TDF managers simply wanting to keep hold of that money all the way through the individual’s retirement, rather than handing it over to a different manager. 

4 Fiduciary Resolutions for 2024

A brand new year awaits us – and with the New Year comes an opportunity to assess and reassess – for some when, resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are some for plan fiduciaries for 2024 – that could benefit plan outcomes for years to come. 

See if your target-date options are over-weight(ed) 

 

Flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms – nearly all of which (despite marketing brochures to the contrary) appear to share very similar views as to what an appropriate glidepath is supposed to look like – and nearly all of which have embraced the notion that a target-date is little more than a speed bump along the “through” target-date glidepath. 

 

A target-date fund is, of course, a plan investment. Like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it – that’s coming straight from the Labor Department). Particularly in view of recent market volatility, it’s worth (re)examining the asset allocations – and perhaps most significantly those that are applied to target dates that are near-term – and ask yourself – should an individual within five years of retirement have that much invested in those options?     

 

Look, the reasons cited behind TDF selection run a predictable gamut: price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers or compatible with their program) – and doubtless some are actually doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics.  

 

Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above – and it’s probably (past) time you took a fresh look. 

 

Pump up the default rate in your auto-enrollment plan

 

While a growing number of employers are auto-enrolling workers in their 401(k) plan, one is inclined to assume that, a decade and change after the passage of the Pension Protection Act, if a plan hasn’t done so by now, they likely have some very specific reasons. 

 

But for those who have already embraced automatic enrollment, those are plans that have (apparently) overcome the range of objections: concerns about paternalism, administrative issues, cost – some may even have heard that fixing problems with automatic enrollment can be – well, problematic (though things have gotten a little easier on that front). 

 

With more than a couple of decades of experience under our belts (a third of that under the auspices of the Pension Protection Act of 2006), we know a couple of things. First, 3% isn’t “enough” (ironically, that is probably what accounts for its popularity – it’s small enough that it wasn’t thought to spur massive opt-outs by automatically enrolled participants). We also know (or should) that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, which is a floor, not a ceiling. And finally, that – at least according to any number of industry surveys – a default contribution rate twice as high as the prevalent 3% would likely not trigger a big surge in opt-out rates. However, there is a great deal of difference in the retirement outcomes between the two. 

 

On an encouraging note, more than half of the respondents to the 66th Annual Survey of Profit-Sharing and 401(k) Plans now have an initial default contribution rate in excess of 3% - and nearly as many (27.6%) have a rate of 6% as do (29.2%). 

 

Give reenrolling a second thought 

 

There is a natural human tendency to apply change from a point in time forward, to apply a new approach in plan enrollment, like automatic enrollment only prospectively, to workers who join the company after the point in time at which it is effective, rather than retroactively. And sure, workers who have had their chance to enroll voluntarily may well, in their refusal to do so, have spoken their intent not to participate at a previous point in time. 

 

However, that was then and this is now. If they don’t want to participate, it’s easy enough to opt-out. But maybe they didn’t fill out that form the last time because they forgot to, because the investment menu was too complicated or intimidating, or maybe the valid reason(s) they had then no longer applied. 

 

Regardless, don’t you owe them the same opportunity that you are giving your new hires? 

 

Develop a plan budget

 

Most financially-focused New Year’s Resolutions focus on spending (less) or saving (more)—and the really thoughtful ones do both—all tied around the development of a budget that aligns what we have to spend with what we actually spend.  

 

Most (many?) plans have a budget when it comes to the expenditures that require corporate funding. Less clear is how many establish some kind of budget when it comes to what participants have to spend. Now, granted, what they pay will vary based on any number of …variables—but an essential part of ensuring that the fees paid by the plan (for the services provided to the plan) is knowing how much—and for what.  

 

At some level, that means not only keeping an eye on things like expense ratios, the options with revenue-sharing and the availability of alternative share classes (or options like CITs)—but it also means having an awareness not only of the plan features but the usage rates of those plan features. 

 

Because when it comes to retirement plans, there often IS a direct link between spending less and saving more.

- Nevin E. Adams, JD

A Glidepath of/for Life

I’ve been getting a lot of … comments … of late about my version of “retirement.”

I heard it both a couple of weeks back speaking at an event sponsored by The Standard—and again last week at the NAPA DC Fly-In Forum—that I was setting a poor example for retirement aspirations (all good-natured, and generally followed by a quick comment that they were glad to see me nonetheless).  So much for long walks on the beach or reading in a rocking chair, I suppose. But it’s my first “go” at retirement, after all—no practice rounds (even my vacations over the years have been a bit “busy”) beyond the “space” provided by COVID’s lockdowns.

That said, my days are definitely different now. And, though it’s perhaps not apparent from the content I (still) produce in any given week (blame the plaintiffs’ bar—if they’d quit suing, I’d have less to write about), I’m pleased to report that I’m (beginning) to ease into new daily patterns; (more) time on the treadmill, actually reading books that have nothing to do with retirement plans/ERISA (or even reality), planning trips, actually putting a bucket list to paper, and yes—even the occasional afternoon nap.  
       

The shift is, admittedly, subtle (my wife would tell you it’s still largely non-existent). But there’s a definite shift in focus from where I’m sitting (albeit not yet in a rocking chair).

To that end, I recently had the opportunity to listen in on a webcast featuring a good friend of mine, Jeanne Thompson, who is now mapping out her own version of “retirement.” Now, I’ve long appreciated Jeanne’s talents for data analysis (and, more significantly, her ability to convey the potential impact and import of that data in a way that “normal” people can grasp)—and on this particular webcast she crafted a perspective on life that mirrored the markets—with both bull and bear passages, but also life choices—as a series of asset allocation decisions. And, as with investing, how the different “markets” of one’s life/career can be influenced by, or sometimes run counter to prevailing forces.

As asset allocation traditionally differentiates between stocks, bonds and cash, Jeanne breaks life down into three major elements: sleep, life and work. Those are broad swathes of existence, to be sure, but when you are talking about something like work/life balance, it’s not a bad place to start from. And, as she graphed out her career experience on that webinar, it was easy to see how life events—promotion to a new position, marriage, the arrival of children, and the “emptying” of that nest were reflected in those allocations of time.

In life, as with the markets, there are external influences that force shifts in those allocations. And yet, we have—or should have—some sense of the allocation we believe to be desirable to meet our goals.  And, if we’re mindful of that compass, we know that adjustments are appropriate from time to time—and that if those adjustments are ignored—well, the results can be…unfortunate.

But, as with any asset allocation decision, it starts with knowing your goals, your time frame(s) to achieve them, an appreciation for the cognizance of the surrounding environment(s), and a commitment to rebalance over time, as appropriate.

And you don’t even have to wait till “retirement” to do so.

- Nevin E. Adams, JD

A Guide Path for Your Glide Path(s)

A recent report—and a new wave of litigation—reminds us that all target-date funds are not designed the same. 

We all know that target-date funds are different, even if their names sometimes suggest otherwise.  Different management teams both set and monitor asset allocations—allocations that can vary widely with regard to the type and quantity of underlying assets. Fees can certainly be different, and some favor a reliance on passive investing versus an active engagement. But the difference that can often account for many of the other differences is the glide path, and more specifically the glide path’s “goal”—and here I am referring to the difference between funds that opt for a “to” retirement versus a “through” retirement focus. 

Now, admittedly it’s a “target date” fund, not necessarily a retirement date fund—and indeed if those were once upon a time considered one and the same, that’s apparently no longer the case. Indeed, and as a recent stream of litigation reminds us, the largest target-date fund providers these days are nearly all in what we call “through” retirement date funds, meaning that their glidepath is designed to carry you past the traditional retirement date “through” to the end of your life.

That’s not an illogical approach—after all, once you get to 65, your odds of making it to 85 (or beyond) are surprisingly good, and two decades is a lifetime[i] (and then some) when it comes to investment time horizons. Indeed, and without question, target-date funds have been a godsend for millions and millions of individuals who are time-pressed and lacking in investment expertise. Let’s face it, even those who have a fair degree of investment acumen find it challenging to keep up with the demands of personal portfolio management alongside the demands of a daily schedule. 

That said, a recent Morningstar whitepaper cautioned (in its title, helpfully) “Plan Sponsors May Not Always Consider Participants’ Behavior or Needs When Selecting Target-Date Glide Paths.” That paper cautioned that “through” glidepaths generally include around 13 percentage points more in equity at age 65 than their peers invested in “to” glide paths, as the average “through” series holds 46% in stocks versus just 33% for the average “to” series. That makes them riskier (or at least more volatile), and potentially riskier than those defaulted into those options may know—or desire.

Therein lies the rub—the Morningstar paper also reminds us that nearly a decade ago the Labor Department provided some "Tips for ERISA Fiduciaries" regarding target-date funds. Tips that included the importance of “Establish[ing] a process for comparing and selecting TDFs,” under which the Labor Department suggested that plan fiduciaries “… should consider how well the TDF’s characteristics align with eligible employees’ ages and likely retirement dates. It also may be helpful for plan fiduciaries to discuss with their prospective TDF providers the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.”

Considering the variety of workforce demographics, and the relatively small number of target-date providers garnering the majority of money flowing into TDFs, it seems unlikely that many plan sponsors have yet really focused on the Labor Department’s tips, specifically with regard to questions of demographic alignment with the TDF glidepaths. For those who haven’t, it’s certainly worth a (re)consideration. 

And while you’re at it, it might be a good idea to make sure that it’s aligned with the communication and education to the participants who’ve been placed upon them.

- Nevin E. Adams, JD

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[i] More cynically perhaps, one can understand and appreciate the interests of those designing the glidepaths in assuming that those invested there would choose to continue to retain that investment expertise, rather than cycle it down and reinvest in a completely different asset class.

‘Damned’ (Even) If You Do

 The flurry of lawsuits unleashed on holders of the BlackRock LifePath target-date funds is not without precedent—but it’s surely a head scratcher.

I’m referring, of course, to the recent swarm of lawsuits challenging nearly a dozen of the nation’s largest 401(k) plans and their decision(s) to select, and hold, on their investment menu the BlackRock LifePath target-date fund suite. It’s a decision that the Shah Miller law firm (on behalf of multiple ex-participant plaintiffs) says was the result of fiduciaries who “chased low fees” over performance.[i]

Of course, it’s not unusual for these types of lawsuits cite obscure articles as authority, rely on Form 5500 data that often doesn’t tell the whole story, state as fact things that are really only theories (or opinions), lean on averages, or base comparative conclusions on surveys distorted by sampling size or content. 

But in a characterization straight out of George Orwell’s 1984, this one draws straight from a point of analysis that, to my eyes, anyway, seems to say one thing while the plaintiffs’ attorneys claim to see something completely the opposite. “War is peace,” if you will.

Setting aside for a minute the reality that performance isn’t necessarily indicative of an imprudent process[ii]—and that it’s been far more common over the past two decades for fiduciaries to be challenged on the allegedly “excessive” fees than performance (though the latter is often tagged on to the fee claim), the plaintiffs here have challenged the selection of a fund suite that Morningstar has identified as among the “best” in that category—run by an “innovative team with topnotch resources.”

Nor is the Morningstar evaluation irrelevant here—indeed, the plaintiffs lean heavily on it to draw their conclusions of poor performance, though they do so primarily by challenging the benchmark, insisting that the suite be benchmarked against other target-date suites—despite their striking difference in focus and glidepath. See, the BlackRock series operates with a “to” retirement date focus, rather than the “through” retirement focus that most others in this space have now embraced (and all of the ones the plaintiffs point to). That means, of course, that the asset allocation, certainly in the components nearing retirement age, are more conservative than those that are managing for 20-30 years beyond that. And—in bull markets, anyway—more conservative often means lower performance. On the other hand—and certainly if your goal is to wind down your investment risk as you approach retirement… and here one can’t help but remember 2008… (not to mention 2022…) 

Not that the BlackRock glidepaths are overly conservative—in fact, the Morningstar commentary (and the lawsuits that cite it) acknowledge that for newer target date funds—those for younger investors—BlackRock’s have tended to be more equity-laden, at least compared with those the plaintiffs would have serve as its benchmark. This lawsuits seem to mistake this difference for some kind of “equity discrepancy,” rather than a deliberate, thoughtful glidepath, one oriented to do what all target-date funds once claimed to—to move to more conservative asset allocations as one neared the target date (and, arguably still do, though the “throughs” have a different endpoint in mind). 

There is, of course, a certain tendency among plan fiduciaries to seek the comfort of the pack in making plan design and investment decisions—which is understandable when one considers the personal liability that comes with that assignment. But these suits seem to create a not-so-subtle inference that any glidepath that varies from the through retirement “pack” is going to be viewed as imprudent—not based on a bad or unreasoned theory, but rather based on a specific time window when certain strategies simply don’t match those of different philosophies. 

So, how is this particular approach constructed? The analysts at Morningstar see it this way: “This index-based series benefits from BlackRock’s robust approach to asset allocation and a research-intensive culture. They keep costs low by investing exclusively in passive index funds, though this gives management fewer tools to outperform over shorter periods compared with more active strategies that can tactically tilt the portfolio or select talented active managers. Yet, the team continues to innovate, with current research looking at ways to get targeted fixed-income exposures across the glide path.”

The report goes on to note that, “Continuing to revisit prior assumptions and make proactive changes that are backed by rigorous research gives us confidence that the team will continue to evolve the series over the long term to investors’ benefit.”

Little wonder then that the BlackRock suite winds up with a “gold” Morningstar Analyst rating. 

What’s harder to figure out is why the plaintiffs’ bar decided to take to task the large plans and plan fiduciaries that opted for this suite and approach. 

Well, perhaps except for the obvious.

- Nevin E. Adams, JD

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[i] There were other allegations that varied with the plan targeted, but the LifePath funds and performance was the dominant claim.

[ii] At this juncture we have no way to know what processes, if any, the charged plan fiduciaries have in place to provide the prudent process and review required of plan fiduciaries—not that the plaintiffs have kept that from inferring its absence. 

After the Fall

I’ve just passed the fifth anniversary of a small fall that took a big chunk out of my life.

It was one of those little things – carrying that last box of Christmas ornaments to the basement for storage – when, just three steps from the bottom, I missed one. All I could think about in the 2 seconds it took me to tumble to the ground was trying not to fall on the ornaments (it was the last box, but who knew what precious memories were in that one?) – though that focus completely disappeared once I hit the floor.

The ornaments, as it turned out, were safe. My left ankle, not so much.

The next several weeks were discouragingly inconvenient when it came to navigating stairs, opening doors (even the ones that are ostensibly designed to accommodate such things), and – worst of all – showering. But perhaps the most frustrating was my rehab stint. I would not have thought it was possible in the space of just 8 weeks to forget how to walk – and yet, I found myself struggling (mind you, I was in a boot). To this day, I don’t descend a flight of stairs without a shudder running up my spine.

The fall, as falls often are, was fast and unexpected – the recovery long and painful.

At a time when the markets continue to stake out new highs on weekly, it is perhaps unseemly to recall that they can, and do, move in the opposite direction. While participants, generally speaking, appear to ride out such storms, those who sell low and buy high inevitably seem to outnumber those who view the downturns as buying opportunities. That said, in 2019 the S&P 500 rose more than 28% – and the average 401(k) balance – buttressed not only by the markets, but by contributions – ended the year 44.9% higher for those workers aged 25-34 with less than 4 years of tenure, while workers with more than 20 years of tenure, aged 55-64, registered a 24.6% increase, according to estimates by the Employee Benefit Research Institute (EBRI).

Indeed, just last week I read that a major target-date fund provider was boosting the equity allocation in its glide paths… explicitly to help deliver improved outcomes. Nor is it the only one to have done so (see Missing the Target). Those moves, ostensibly informed by economic insights and research, are perhaps tempted by the long-running bull market (and doubtless aware that, despite all the cautions to the contrary, that investors – and plan fiduciaries – are often drawn by past performance like moths to a flame).

Now, our industry has long cautioned savers that you can’t invest your way out of a savings shortfall, though surely improving outcomes is a shared goal. Not that it isn’t a tempting recourse – certainly for those who are awakening to financial realities late in their working years. These days the trend is to embrace glidepaths that sail “through” the stated age of retirement (“through” rather than “to”[i]), though one can’t help but wonder if those defaulted onto those paths are cognizant of the difference. Or if, as was the case a bit more than a decade ago, those on the brink of retirement will discover that there can be a significant gap between a glidepath that is “more” conservative, and one that truly lives up to that description.

Because, after all, falls are often unexpected. The recovery slow and painful.

- Nevin E. Adams, JD

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[i] Though the 62^nd Annual Survey of Profit-Sharing and 401(k) Plans from the Plan Sponsor Council of America found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement.

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7 Signs of the Times

A month ago, when we wrote about the 61^st Annual Survey of Profit Sharing and 401(k) Plans from the Plan Sponsor Council of America (PSCA), there were several key points highlighted – but there are some interesting findings you might have overlooked.

Perhaps the most significant finding of that survey – the longest running of its kind – was a record employer contribution rate (5.1% of pay) and a total savings rate in excess of 12%, the highest percentage ever recorded in the history of the survey. Also noteworthy was that nearly three-fourths (73.1%) of plans now retain an independent investment advisor to assist with fiduciary responsibilities – up from 69.5% in 2016.

But here are some findings from the survey of plan sponsors that you might have missed.

There’s less ‘waiting.’

Once upon a time, the norm was to have participants wait a year before letting them participate in the 401(k) plan. There was administrative logic in that decision – after all, turnover rates being what they are, why go to the bother of setting someone up to contribute to the plan (and match those contributions) if they were only going to be around for a short time?

But the most recent PSCA survey finds that nearly half (47.2%) of surveyed employers allow for immediate eligibility, and more than half (55.7%) of the largest plans do. In fact, even among the smallest employers, more than a third (35.3%) let workers become participants immediately.

Not to mention that nearly 40% of plans provide immediate vesting for matching contributions.

Sponsors are making savings suggestions.

Nearly a third (31.2%) of plan sponsor respondents say they provide a suggested saving rate to participants, and for more than 4 in 10 that rate is 10% (28.5%) or higher (12.7%).

There’s a growing role for rollovers.

Just under 4 in 10 (39.4%) of responding plans say they actively encourage participants to roll assets into their plan (though that was somewhat less common among the largest plans). Little wonder, since more than 95% of 401(k) plan sponsors say they accept rollovers from other plans.

There’s a real ‘to or through’ target split.

More than half (55.4%) say their target-date fund goes “through” retirement, while the rest have embraced a “to” retirement glide path. Wonder if participants in those plans appreciate the difference?

Participant behaviors are being tracked.

Not surprisingly, and for any number of legitimate reasons, contribution levels are the most monitored participant behaviors. The vast majority (85%) of the largest plans do so, as do nearly two-thirds (62%) of the smallest. What’s a bit striking is that the second most monitored behavior – and one that held true against nearly all plan sizes (except the smallest, where it was third,after investment allocation) – was loan usage.

Does anything happen with this tracking? About half (45.4%) of plan sponsor respondents said they took action based on what they learned from monitoring participant behaviors.

Traditional success measures (still) matter most.

While more than three-quarters (84.8% of the largest plans) evaluate whether their plan is successful, the benchmarks used are fairly traditional. Participation rates are the most common (90.8% of all plans), with deferral rates (75.8%) looming large, but a distant second. Fewer than a third (31.4%) use income replacement ratios.

Many weren’t looking to make big changes.

More than a third (34.7%) planned no changes at all, and even more (39.9%) planned only “minor changes to the investment lineup.”

- Nevin E. Adams, JD
 
More information about the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.

5 Things the DOL Wants You to Know About TDFs – That You May Have Overlooked

Target-date funds continue to expand in usage and popularity – but there are some things the Labor Department wants you to know about TDFs that you may have overlooked.

When the Labor Department published its “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries” in 2013, I was pleased to see it, and to discover that it could be read ¹ (and understood) in about 15 minutes.

But in preparation for a recent webcast on the topic, I took a fresh look at that document, and found some nuggets that I hadn’t really picked up on the first time around.

It’s Not Just About Fees and Performance

As part of a reminder about the importance of establishing a process for comparing and selecting TDFs, the Labor Department specifically references considering prospectus information, such as information about performance (investment returns) as well as investment fees and expenses.
However, in that same topic point, the agency says that plan fiduciaries should consider how well the TDF’s characteristics align with eligible employees’ ages and likely retirement dates, “as well as the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.”

‘To’ Versus ‘Through’ Matters

Considering what can be some pretty significant outcome differences in glidepaths between “to” (those that build to a specific target retirement date) and “through” (those that assume a glidepath to death), I’ve always found it curious that the Labor Department’s tips don’t make more of what seems a pretty big structural difference in these offerings.

While the “to” and “through” focus is covered in “Target Fund Basics” in the piece, under the bullet regarding “understand the fund’s investments,” the Labor Department’s information sheet notes that “some funds keep a sizeable investment in more volatile assets, like stocks, even as they pass their ‘target’ retirement dates,” going on to explain that “these funds” are generally for employees who don’t expect to withdraw all of their 401(k) account savings immediately upon retirement, but would rather make periodic withdrawals over the span of their retirement years. That approach is contrasted with the “to” version that the Labor Department says are “concentrated in more conservative and less volatile investments at the target date, assuming that employees will want to cash out of the plan on the day they retire.”

But what’s key here is the closing sentence: “If the employees don’t understand the fund’s glide path assumptions when they invest, they may be surprised later if it turns out not to be a good fit for them.”

Indeed.

Higher Costs Can Be Justifiable

It should come as no surprise that the Labor Department’s tips include an admonition about the need to be attentive to the impact of fees on retirement savings, and the structural layering typically associated with TDFs that can imbed layers of fees as well.

However, rather than merely condemning options that carry higher fees, here the Labor Department notes that, “If the expense ratios of the individual component funds are substantially less than the overall TDF, you should ask what services and expenses make up the difference,” going on to note that added expenses may be for asset allocation, rebalancing and access to special investments that can smooth returns in uncertain markets that “may be worth it.”

Custom TDFs Could Be Viable Alternatives

The Labor Department tips note that “a ‘custom’ TDF may offer advantages to your plan participants by giving you the ability to incorporate the plan’s existing core funds in the TDF,” and that “nonproprietary TDFs could also offer advantages by including component funds that are managed by fund managers other than the TDF provider itself, thus diversifying participants’ exposure to one investment provider.” It does acknowledge that there are some “costs and administrative tasks involved in creating a custom or nonproprietary TDF, and they may not be right for every plan.”

This “tip” was actually pretty plainly spelled out in one of the headlines – and yet, I remember thinking at the time that this wouldn’t be a very popular approach for most. But times are changing, technology continues to advance, and for advisors looking to differentiate themselves in the development of what is likely to become the largest plan investment, custom TDFs would seem to be a more viable solution than ever.

You Might Have to ‘Break Up the Set’

A TDF is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary. That said, TDFs are frequently, if not always, pitched (and I suspect bought) as a package. While each fund in the family is reviewed separately, and certainly should be, breaking up the set certainly carries with it a series of complicated consequences, not the least of which are participant communication issues and glide path compatibility. Not that those can’t be overcome – and not that those complications would be deemed sufficient to retain an inappropriate investment on the plan menu – but it doesn’t take much imagination to think about the heartburn that might cause a plan sponsor.

However, as the Labor Department’s tips remind us, should a TDF’s “investment strategy or management team changes significantly, or if the fund’s manager is not effectively carrying out the fund’s stated investment strategy, then it may be necessary to consider replacing the fund.” That’s right – “the” fund. Similarly, the Labor Department cautions that “if your plan’s objectives in offering a TDF change, you should consider replacing the fund.” Again, note the use of the singular, not the plural.

Finally, one item not included in the piece – but arguably one that applies to every fiduciary situation – is that if you lack the requisite expertise to make the decisions as the prudent expert the law requires, you should engage the services of someone who has that expertise.

- Nevin E. Adams, JD

See also:

• 5 Things You Should Know About Target-Date Funds
• Target-Date Fund Misperceptions Abound

Footnote

1. The key bullets outlined in the DOL tips are simple and straightforward – and to my eyes pretty much fiduciary common sense. They included suggestions/admonitions to: (1) establish a process for comparing and selecting TDFs; (2) establish a process for the periodic review of selected TDFs; (3) understand the fund’s investments – the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time; (4) review the fund’s fees and investment expenses; (5) inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan; (6) develop effective employee communications; (7) take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection; and (8) document the process.