401(k) Specialist Issue 2 - 2023 - 37

401(k) INVESTMENT INSIGHT
The Secret Metamorphosis of Target
Date Funds
By Ron Surz
OLIGOPOLIES ARE NEVER good for consumers
because they block new entrants and
stifle innovation. Such is the case with target
date funds (TDFs). 70% of the $3.5 trillion TDF
industry is managed by just 3 firms-Vanguard,
Fidelity and T. Rowe Price. That's an oligopoly.
Plan sponsors have been limited to onesize-fits-all
TDFs provided by a few dominant
asset managers who like things just the way
they are. Only a few fiduciaries have dared
to stray from the oligarchs, overcoming the
fear of losing the protection of procedural
prudence-doing what other fiduciaries do.
Most fiduciaries are unaware of the
ongoing metamorphosis that is transforming
401(k) investing and providing substantive
prudence-doing what is best for beneficiaries.
A few non-oligarchs provide the variety
and richness of institutional investment
options personalized to the specifications
of plan participants. These services are not
being utilized much yet, but now that you
know, tell everyone.
No, these are not custom TDFs-that's
yesterday's gimmick. These innovations are
much better. They are personalized target
Name
Soteria
iGPS
Goals
Optimization
Goal Maker
YourPath
myTDF
Provider
Target Date
Solutions
Nexus335
Franklin
Templeton
Empower
Lincoln
Financial
PIMCO
date accounts (PTDAs)-the ultimate in customization-made
possible by technological
advancements.
The table on this page summarizes some
of the PTDA providers.
You'll recognize most of these providers.
These non-oligarchs are taking the lead in solving
the one-size-fits-all problem in TDFs, a serious
shortcoming acknowledged by everyone.
Interestingly, their approaches are all different.
Some are designed solely for defaulted
Partners
Open:
Go Anywhere
iJoin
Vestwell
Proprietary
Proprietary
Proprietary
Approach
Patented
Glidepaths
Big Data
Artificial
Intelligence
Morningstar
Glidepaths
Morningstar
Glidepaths
Morningstar
Glidepaths
participants to serve as the Qualified Default
Investment Alternative (QDIA). Others serve
both defaulted and self-directed participants.
The Best PTDA
The best PTDA has realistic objectives and
protects against Sequence of Return Risk in
the Risk Zone.
Some PTDAs attempt to make a risk
decision for defaulted participants by using
data on the recordkeeper platform. This is a
mistake because that data tells you very little
about the participant. Defaulted participants
do not want to engage so their situation and
risk preferences cannot be known.
The risk decision for the QDIA is best left
to the plan sponsor, who should be given a
lot of flexibility in this decision. For example,
the target date should be the actual date
rather than a 5-year or 10-year cohort, and
the risk decision should be customized as
noted below in the paragraph on glidepaths.
Self-directed participants appreciate the
ability to personalize. These participants
choose their risk and their target date, and
they can change these at will.
The glidepaths provided by the PTDA are
the most important consideration. At least
one of these paths should defend against
Sequence of Return Risk, something that
most TDFs don't do. Ideally, three glidepaths-low,
middle and high risk-are provided
by the plan sponsor and participants
can blend these.
Conclusion
" Save and protect " is the mantra for retirement
with dignity. We need to save enough
and protect our lifetime savings as we approach
retirement. The journey is complicated
and ill-served by one-size-fits-all. Personalization
is not just a nicety. It's a necessity.
Ron Surz is CEO of Target Date Solutions (TDS). He
can be reached at Ron@TargetDateSolutions.com
ISSUE 2 2023 | 401kSpecialist.com
37
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401(k) Specialist Issue 2 - 2023

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