Pendulums tend to swing to extremes before they stabilize. It seems that everyone is advocating a move towards professionally managed investments like target-date funds (TDFs) for most participants. But are they right for everyone and, if not, what’s the alternative?
While conceding that most DC participants do a very poor job at creating age appropriate, diversified portfolios, the answer, according to William Ryan at Aon Hewitt, is not TDFs for everyone. Instead, Ryan suggests building simplified core line-ups that look and act like custom TDFs. With an average of over 13 funds in DC plans, funds that often have confusing and technical names that participants don’t understand, it’s no wonder that 14% of participants pick one or two asset classes according to Aon Hewitt 2014 research. We all know that too much choice can actually inhibit participation.
Ryan suggests that plans build white-labeled, custom multi asset objective based investments using both active and passive ingredients. The four options might include:
- Growth
- Income
- Capital Preservation
- Inflation
Rather than have a series of growth funds, Ryan suggests a professionally managed white-labeled growth investment, for example.
According to the 2014 Aon Hewitt research (which serves larger DC plans), 25% of plans offered some sort of investment white labeling for the following reasons:
- To combine multiple managers (71%)
- Ease of changing managers (64%)
- Ease of participant communications (57%)
- Lower total fund fees (43%)
Ryan’s suggestion lies somewhere between TDFs and giving participants the option to build their own age appropriate, diversified portfolio — an unbundling of TDFs of sorts for those that want some but not ultimate choice. Interesting, especially with some larger advisor groups building their own CITs to, in part, get more revenue as their advisory fees are declining.
