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How retirement plan service providers may win first mover advantage

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Retirement plan service providers may soon be grappling with the “innovator’s dilemma,” a phrase coined in the 1990s that has evolved to be known as “disruptive innovation.” This describes when companies face disruptive technologies but are hesitant to respond since it might undermine their current, profitable business—a hesitation that may eventually  lead to market share loss.

Two new trends in the defined contribution space  may be especially consequential for recordkeepers. They are the growing reluctance of plan sponsors to accept a recordkeeper’s off-the-shelf target date fund offerings and disenchantment with the participant-level, professionally managed account option within a DC plan.

Increasingly, plan sponsors—and their advisors—are resistant to being limited to whatever target date fund a recordkeeper makes available. This is due to their growing realization that off-the-shelf target date funds are unable to address participant demands for greater customization, research-vetted investment strategies, and access to more asset classes.

Plan sponsors  may consider the managed account option—also known as advisor managed accounts, or AMAs—to address these demands, but they are not without their shortcomings as they:

  • can carry higher fees for participants, which may reduce investment returns;
  • require a level of engagement that participants do not fully understand (e,g, completing risk questionnaires), or are disinclined to meet; and
  • may be time-consuming to administer and may increase their fiduciary oversight responsibilities and risks.

Many plan sponsors remain committed to offering participants the potential for improved retirement outcomes.  While Advisor Managed Accounts and off-the-shelf target date funds may work for certain plans, the investment flexibility that is now available to plan sponsors to craft portfolios that align with the sponsor’s overall benefit program and employee demographics, may have them asking their Retirement Plan Professional (RPP) about custom solutions.

The catalyst for change

In their role as a retirement plan professional, RPPs have become the nexus for what is shaping up as the next big investment trend in 401(k)s—custom target date portfolios.

Custom target date portfolios enable RPPs the flexibility to work with their plan sponsor client to design and model scalable, customized portfolios that:

  • combine active and passive investment options in mutual fund and Collective Investment Trust (CIT) vehicles;
  • incorporate the best elements of target risk and target date methodologies;
  • offer more asset class exposures; and
  • keep costs for participants comparable to off-the-shelf target date funds.

These benefits, combined with a simple enrollment process and backed by rigorous investment research, are leading many RPPs to educate plan sponsors about the value of  custom target date portfolio models.

In fact, this is already occurring with the largest plan sponsors; a recent survey by Pensions & Investments found that custom target date portfolios grew by 19.5% over the last year, and more than doubled (up by 117.4%) over the last five years.1

As we have seen with other innovations, they tend to start in the mega plan market and work their way down to the large and mid-size plan markets.  Custom target-date offerings have been in the mega plan market for over 15 years, and technology and trading advances have now enabled RPPs to offer this solution to their plan clients as well.  

The response imperative

As RPPs drive this next evolution toward custom target date portfolios, retirement plan service providers will need to be prepared to accommodate this progressive investment solution.

A slow response to this fast-evolving landscape has several short- and long-term implications for retirement plan service providers. We see three major potential risks:


  1. Decline in new business: The first and most immediate impact could be on new business. As plan sponsors move toward custom target date portfolio options, service providers that are unable to service this investment option will be unable to compete for that business.
  2. Persistent leakage in existing business: RPPs and their plan sponsor clients regularly review existing plans, looking for ways to improve retirement outcomes for both the plan sponsor and plan participants. As the cost and investment advantages of custom target date portfolios surface during these reviews, the potential  transition toward incorporating such an investment option will force plan sponsors to find a new service provider who has the requisite recordkeeping capabilities.
  3. Damage to brand: RPPs will be hard pressed to keep service providers that are unable to service custom target date portfolios on their preferred provider short-list. It could be a loss of mind share.

There are opportunities, however, in light of the changes the retirement industry is undergoing. Forward-thinking retirement service providers can get ahead of this trend and profit in several key ways:

  • First mover advantage often leads to greater market share capture.
  • Offering recordkeeping on custom target date portfolios can win the attention of RPPs who play a principal role in the pivotal retirement plan decisions made by plan sponsors.
  • Building the recordkeeping capability for custom target date portfolios may  serve as an important step in retaining plan sponsor relationships.

Of course, the hesitation to change is understandable; it mirrors the “innovator’s dilemma,” where the “new” erodes the profits of existing products.



Important Information for BNY Mellon Custom Target Date BuilderSM

General. The Custom Target Date Builder is designed to help financial professionals assess how custom target date portfolio models may be built for their defined contribution plan clients. Unlike a target date fund product that invests in a fixed set of funds that do not vary by plan, a custom target date portfolio model uses the actual fund options included in a plan’s particular investment menu. This online tool may be used to create hypothetical custom target date models that are comprised of portfolio allocations for plan participants with different target retirement ages based on a proposed plan menu that you select for the plan. The proposed fund menu must meet certain asset class requirements, and at least two BNY Mellon fund options must be included. You will also be asked to choose from 5 different levels of risk for the model’s glidepath.

Powered by Wilshire. Based on this information, hypothetical custom target date portfolio models will be generated using the glidepath methodology of Wilshire Associates Incorporated (“Wilshire”). The Custom Target Date Builder is distributed by BNY Mellon Securities Corporation (“BNY Mellon”), a registered broker-dealer and a BNY Mellon Investment Management firm. Wilshire has been engaged by BNY Mellon to develop this online tool on its behalf. The Custom Target Date Builder does not provide investment advice, and BNY Mellon and Wilshire are not acting as fiduciaries under this online program. For purposes of determining the proposed fund menu, financial professionals may choose from the plan’s existing fund options or any other option from a universe of available funds. However, only those funds that have been pre-screened by Wilshire will be selected for asset allocation under its models. Additionally, fund options from Wilshire’s list of preferred funds that have passed its investment manager due diligence screens (the “Focus List”) generally will also be selected for asset allocation. The mere fact that a fund has been placed on Wilshire’s Focus List, or is otherwise selected for asset allocation under its models, should not serve as the primary basis for any plan investment decisions. Any fund (including its share class) that is available for selection for the proposed fund menu may or may not be accessible through the plan’s existing recordkeeping platform.

Educational Purpose. The hypothetical portfolio models that are generated by the Custom Target Date Builder, including any Focus List or any other funds selected for asset allocation under Wilshire's models, are intended to be educational, and they are not tailored to the investment needs of any specific plan or plan investor. The funds or proposed funds that are included in the portfolio models represent just one way that a diversified portfolio may be constructed and not the only way to construct a diversified portfolio. Accordingly, the portfolio models including any funds selected for asset allocation should not serve as the primary basis for any plan investment decisions, and the portfolio models generated by this online tool should not be shared with plan participants. The provision of this hypothetical portfolio model information including any funds identified from the Focus List do not obligate Wilshire or BNY Mellon to provide any such information on a regular basis.

Portfolio Model Providers. The plan client/fiduciary does not have an agreement with Wilshire (unless they have engaged Wilshire to provide the “3(38) Investment Manager” Services for Model Portfolios). Plan fiduciaries should carefully research any potential fund or portfolio model before making an investment decision, and other funds or portfolio models with similar risk and return characteristics may be available. If a plan client wishes to implement any custom target date portfolios, Wilshire or another 3(38) portfolio model provider should be hired by the plan client. Unlike Wilshire, other 3(38) providers may be unable to implement custom portfolios unless they are also hired to select the plan menu. BNY Mellon’s Custom Target Date Builder does not provide fiduciary advice with respect to the construction of portfolio models, or the selection of 3(38) portfolio model providers for plans.

Investors should carefully consider the investment objectives, risks, charges and expenses of the investment options in the plan before investing. For mutual funds and bank-maintained collective investment funds, the prospectus or similar disclosure document contains this and other important information and should be read carefully before investing. For a prospectus or similar disclosure document, please contact your BNY Mellon Retirement Specialist.

All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks.

An investment in a target date strategy does not eliminate the need for an investor to determine whether a strategy is appropriate for their specific financial situation. An investment in a strategy is not guaranteed. Investors may experience losses, including losses near, at, or after the target date, and there is no guarantee that a strategy will provide adequate income at and through retirement.

Bank-maintained collective investment funds and their units are not registered under federal and state securities laws in reliance upon applicable exemptions. Because these funds are not mutual funds, they are governed by different regulations, restrictions and disclosure requirements. For example, these funds are subject to banking and tax regulations which, among other things, limit participation to certain eligible qualified retirement plans (stock bonus, retirement, pension and profit sharing accounts) and governmental plans.

The tool will require a minimum of two BNY Mellon Investment Management investment options be included among up to 18 strategy allocations in the target date portfolio.

The use of the tool is subject to Wilshire’s User Agreement.

BNY Mellon Investment Management is one of the world’s leading investment management organizations, encompassing BNY Mellon’s affiliated investment management firms and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

BNY Mellon and Wilshire Associates are not affiliated entities.

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