While target date funds (TDF) flourish, managed accounts haven’t caught on as a qualified default investment alternative (QDIA), mainly due to higher fees and a struggle by participants to fully realize the benefits of customization.
But that will soon change, according to Wilshire, who admittedly has a dog in the fight. Not surprisingly, the firm believes the future of defined contribution investing is personalization, and the current separation of TDFs and managed accounts will “fall away.”
In a recent report, the firm noted that QDIA model portfolios leverage a managed account "chassis" to create personalized model portfolios at the plan level (something akin to custom target date funds, or CTDF), and “we anticipate QDIA model portfolios will not only be offered at no additional cost to the plan sponsor, but also include additional discounted fees for recordkeeping services.”
They could also integrate recordkeeper data “to reflect differences among participants across income, savings rate, account values, etc., to personalize portfolios without any participant engagement.”
The same can be said for personalized TDFs. A managed account chassis would use the same participant information, including income, savings rate, and plan balances, among others, to “enhance participant assignment and allocation to a TDF vintage portfolio(s) based on more than age alone.”
Lastly, the report mentioned the passage of the Secure Act in 2022, and the “turbo charged” innovation in lifetime income space.
“The key enabler of these solutions will likely be TDFs and managed accounts, with plan participants benefiting from the purchase of annuities to protect against the combination of uncooperative investment markets and long life,” the firm concluded. “The benefits of the incorporation of annuities in professionally managed portfolio solutions range from the use of third-party financial experts overseeing the selection, negotiation and monitoring of the specific annuity product and insurance providers, determining how much to annuitize and how to modify corresponding portfolio allocations to leveraging the pooling of participant assets to do so on more advantageous terms than available in the retail market.”
