The ultimate responsibility for retirement investing and planning increasingly rests on the shoulders of individuals. Workers must count on defined contribution (DC) programs to meet their retirement savings needs, as few today have the defined benefit pension that traditionally offered financial security in their golden years.
To help ensure they reach their retirement income goals, they often look for expert advice. DC participants are often offered one or more sources of advice, either delivered within an investment structure or a separate offering.
The primary question being addressed for participants is this: “How should I invest my money?” Target-date strategies and managed accounts both aim to answer this question for participants and, better yet, shift an individual’s asset allocation over time.
Technology helps workers see and understand how their retirement plans are progressing PLACING TRUST IN SPONSOR OR EMPLOYER
For the mass population, these packaged, technology-delivered advice solutions fill an important need in the retirement market. Unlike target-date strategies, managed accounts give participants the opportunity to view retirement income projections, to add in outside funding (for example, spousal retirement savings), as well as the option to modify risk levels to inform the advice models.
In reality, however, fewer than 20% of managed account participants add information into the models. As a result, the advice from the managed account system may be no more informed than target-date strategies – that is, both will tend to default a participant based on the assumed number of years to their retirement date or the expected time horizon for investment.
Despite the fact that few participants engage with their managed accounts in this way, both target-date strategies and managed accounts offer a big advantage over static balanced portfolios or participant self-selection from a fund line-up. By at least managing assets with a participant’s anticipated time horizon in mind and offering professional oversight, they are likely to serve workers better.
The most important role these offerings must play is their ability to evaluate the underlying advice and confirm its appropriateness for plan participants. This is important because workers defaulted into these programs are highly likely to remain invested in them over many years – and even throughout their retirement years when they retain assets in the DC plan.
YOUNG AND OLD TAKE ADVICE THROUGH NEW TECHNOLOGY
In the US, the take-up of managed account and advice solutions delivered to end users through technology, rather than face-to-face advice, seems to differ by age cohort. Those most interested tend to be either very young or much older people. The interest among those closest to retirement is surprising. It’s not yet clear why this is so, and further research needs to be done.
In many cases, participants blindly trust their plan sponsors or employers to put them on the right path toward reaching their goals and trust that they are receiving reasoned and appropriate guidance. In essence, the tendency for schemes to default participants, combined with the participants’ own inertia, determines early on whether participants are likely to succeed or fail in meeting their income goals.
Given their weighty responsibility here, it’s all the more important for plan sponsors to evaluate the plan’s default investments carefully – whether target-date strategies, managed accounts or other types of investment. It is absolutely critical, then, that fiduciaries are able to evaluate the risks. They need to ask the right questions, receive guidance on selecting sound advice and be helped to evaluate advice providers.
DON’T BE DAZZLED BY TECHNOLOGY
Technology helps workers see and understand how their retirement plans are progressing – people like to see the balance of their DC accounts on their phones and how they are allocated. It makes the planning process so much clearer and easier for the individuals. But it’s important not to be dazzled by technology.
The plan sponsor must not lose sight of the end goal: to help people build purchasing power in inflation-adjusted dollars with investment plans that minimize risk and perform regardless of the kind of economic environment they operate in. Advice made easy through digital tools is a step forward, but it has to be sound advice.