Over time, target-date funds (TDFs) have become the Toyota Corolla of retirement investing: standard, reliable, economical — and maybe a little bit boring. Luckily, as TDFs have changed, they have morphed into an entity that lends itself to easier and greater personalization toward the participant.
This is good news for investors, and it’s good news for financial advisors as well, since studies show that more than 90% of investors go along with this default option and its algorithms, demonstrating their indifference or reluctance to managing their own financial investments. What do you — and your clients — need to know about how target-date funds serve investors, and how you can help them leverage the advantages these funds have come to offer?
Basic vs. Custom
TDFs are convenient for both participants and plan sponsors because they require little effort on anyone’s part, and they work. But how well do they work? Oftentimes they work well enough, but it’s a fact that a participant’s retirement nest egg could be feathered more luxuriously if they — or their financial advisor — had taken an interest in tailoring the funds according to the individual’s personal goals rather than merely their retirement age.
While it is legitimate for an algorithm to decide, based on a participant’s age, how much they will need in retirement, financial advisors know there are thousands of other factors to consider, including:
- Is the participant married and if so, does their spouse work and contribute to their own 401(k)?
- Is the spouse significantly younger (i.e., has more potential years to earn money)?
- Are there any health concerns on the horizon?
- Does the participant have other retirement vehicles such as a personal IRA or other assets such as a home, vacation home, investment property, business, stocks, jewels, a stockpile of rare beanie babies, etc.?
- What is the participant’s expected lifestyle in retirement? Will they live as they do now, or do they expect to move, downsize, travel extensively or make another major life change?
- Will the participant have substantial expenses in retirement such as paying for eldercare for themselves or their parents, tuition for themselves or their children, weddings, funerals, etc.?
- Does the participant have a large mortgage or a lot of debt to pay down?
The answers to the above questions could impact the level of retirement funds necessary by hundreds of thousands of dollars.
Help with Portfolio Design
Here at 401GO, we offer the services of an automated portfolio builder to help participants better tailor their investments to their needs and preferences. This tool is particularly helpful to participants who work with us because we offer so many more options — more than 100. This level of choice can feel overwhelming to some, which is one reason we created our automated portfolio builder — as a way for investors to participate in their retirement fund choices without feeling overload.
But the automated portfolio builder isn’t for everyone. Many plan participants are happy with their company’s TDF and the algorithm’s management and see no reason to tinker with it. It’s a great hands-off default for those who don’t want to give their retirement much thought.
Others desire more than our automated portfolio builder provides — the personal touch of a real live financial advisor. By talking to 401(k) plan participants personally, learning their goals, determining their tolerance for risk and factoring in other considerations, you can help craft a specific retirement plan just for them.
Important Changes to TDFs
You may be aware that TDFs used to come with fairly steep fees that could impact participants’ gains, but that is no longer necessarily the case, despite the fact that 70% of the TDFs are controlled by just three players — Fidelity, Vanguard and T. Rowe Price. Greater transparency, improved service and competitive fees have grown with the popularity of TDFs, making them more attractive to businesses across the U.S. Still, it can be worth it to your clients to see what some of the smaller players in the game have to offer as well.
The Future of TDF Management
While inflation, interest rates and other factors also have an impact on TDFs and how they are managed, these moving parts are what financial advisors and anyone in finance understands is simply part of the job of overseeing investment accounts.
When you’re working with small businesses, their employees or individual clients, remember that 401GO offers the fastest, easiest path to getting a 401(k) up and running, without any of the usual hassles or constraints. Contact us today for more information.
