Changes in retirement plan benefits have occurred at a breakneck speed in the last decade, encompassing a cascade of new features (e.g., auto enrollment and escalation), new planning tools, and more diverse investment options.
Plan sponsors have worked hard to keep up with these changes, recognizing that a well-designed employer-sponsored retirement plan can be one of the most effective tools in attracting and retaining talented employees. According to one survey, 67% of job seekers said that a good 401(k) was “very important” or “important” in their evaluation of a job offer.1
Pros and cons of managed accounts in a DC plan
One of the more recent developments in DC plans has been the addition of a managed account investment option—also known as Advisor Managed Accounts, or AMAs - which offer the ability to select an investment option to comprise more personalized guidance and wider latitude in plan investment decision-making.
The participant-level professionally managed account option within a DC plan offers a number of valuable diversification and investment personalization benefits to individuals, but they are not without their shortcomings. They may be a significantly more expensive option for participants, which may have the adverse effect of reducing long-term returns. Moreover, managed accounts involve a level of engagement that many participants may be unprepared for or not interested in meeting (e,g, completing risk questionnaires).
Managed accounts are also problematic for plan sponsors, as they can be time consuming and labor intensive. They can also increase fiduciary oversight responsibilities and risk.
While Advisor Managed Accounts may be offered as an “all in one” investment solution for participants in some retirement plans, we believe that plan sponsors will begin gravitating toward an alternative investment solution that offers customization at the plan level with open architecture investment solutions and a wider range of glide paths that may better align overall target date design to participant demographics and specific employee benefit programs.
Custom target date portfolios: The next generation of investment choice
The introduction of custom target date portfolios into a DC retirement plan are designed to help plan sponsors meet important plan objectives, while also setting the groundwork for the possibility of improved participant outcomes.
The increasing attention and adoption rate of custom target date portfolios by plan sponsors is the product of how a plan provider can meet cornerstone plan objectives, including:
- Reducing fiduciary risk by delegating the related investment responsibilities to a 3(38) fiduciary providing asset allocation guidance within an ERISA framework.
- Enabling customized target date portfolios that have the flexibility to reflect the needs, demographics, financial circumstances, and investment sophistication of participants at the plan level, while taking into account the full scope of a plan sponsor’s benefits package.
- Providing institutional-grade, independent manager selection and asset allocation guidance generally unavailable to smaller and mid-sized plans until now.
- Improving participant satisfaction levels by offering them:
- a modern and comprehensive investment solution;
- ease of access to a research-backed, institutional designed product;
- a mix of active and passive management strategies in mutual fund and Collective Investment Trust (CIT) vehicles;
- customization without the burden of filling out forms and questionnaires;
- modeling of an open architecture, custom target date portfolio at a similar cost to off-the- shelf, non-customized portfolios;
- potential for reduced investment and longevity risk; and
- potential for realizing better investment outcomes.
Considering these advantages, it comes as little surprise to see that custom target date portfolios are one of the fastest growing investment menu choices of large plan sponsors, rising 19.5% in the year-ended September 2019 and by over 117% in the last five years.2
It is likely that small and mid-size plan sponsors would want access to the same kind of benefits of custom target date strategies that larger plans enjoy.
To learn more about customized options for small and midsize plan sponsors, contact your retirement plan professional.
1 https://www.betterment.com/resources/the-top-three-401k-benefits-for-employers
2 https://www.pionline.com/pi-1000-largest-retirement-plans/target-date-funds-remain-voracious
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.
Not FDIC-Insured | No Bank Guarantee | May Lose Value
MARK-192135-2021-05-21
