With spring already here and summer arriving soon, these warmer months offer a perfect time to hold a wedding and celebrate two people committing to share their lives with each other. Amid this happy wedding season, it’s also important to look ahead. Retirement plans are the best way to secure a couple’s future, and just as two people entering marriage are often well matched, target-date funds and advisor managed accounts represent a perfect match in a retirement plan solution.
Target-date funds (TDFs) are a widely used default retirement plan investment option that assigns participants to a well-diversified investment allocation based on their age and years until retirement. Advisor managed accounts (AMAs) were created more recently and offer a personalized solution that not only considers a participant’s years until retirement, but also takes many additional factors into account — including a participant’s balance, savings rate, spousal assets, other savings accounts, pensions, and more. While both solutions periodically update a participant’s investment allocations as they get closer to retirement, AMAs consider life changes such as a raise, change in marital status, etc. and provide recommendations and guidance on a savings rate, retirement age, and withdrawal strategy to better prepare participants to achieve their retirement income goals.
These offerings in tandem can create a very comprehensive and competitive retirement plan for participants. There are two typical ways in which they’re provided together:
- Default TDF and opt-in AMA. Both target-date funds and advisor managed accounts are qualified default investment alternatives (QDIAs), meaning a plan sponsor can default their participants into either solution. However, many plan sponsors are more likely to default their participants into a target-date fund because these are a more familiar solution that has no additional fees beyond the fund expenses. Furthermore, many plan sponsors are not aware that most of the factors used to personalize a participant’s AMA solution can be provided automatically by their plan’s recordkeeper. In this first approach to pairing TDFs with an AMA, plan sponsors will offer an advisor managed account as an opt-in service, and once everyone is defaulted into a TDF, they can educate participants on the value of an AMA. If a participant would like something more personalized and holistic, that includes a recommended savings rate and other retirement planning features, they can easily switch from a target-date fund to an advisor managed account.
- Hybrid QDIA. The second approach is often referred to by three different names: hybrid QDIA, dual QDIA or dynamic QDIA, but they are essentially all synonymous. This is when a plan sponsor defaults participants below a certain age into a TDF, and participants at or above that age will be defaulted into an AMA because plan sponsors recognize that people’s financial situations often become more complicated as they get older, which increases their need for a more personalized solution. Of course, participants initially defaulted to a TDF will automatically transition to an AMA when they reach the designated age (unless they made their own investment elections prior to the transition). The transition age between TDF and AMA varies by plan sponsor, typically ranging from 40-50, with 45 being very common. However, younger participants defaulted into a TDF who feel they would benefit from a more personalized, comprehensive retirement planning solution, can still elect to enroll in the advisor managed account service. Similarly, if a participant is defaulted into an AMA but doesn’t feel that it provides them additional value, they can opt out of the AMA and invest in the target-date fund for their age cohort or choose their own investment strategy.
Compared to target date funds, advisor managed accounts are relatively new, so it will take time for plan sponsors to become more familiar their use as part of a QDIA solution, and to understand the additional value an AMA service can bring to participants. But the use of AMAs as part of a hybrid QDIA has increased as plan sponsors realize the high degree of personalization AMAs can offer by simply using data provided automatically by their recordkeeper. Similarly, AMA adoption has continued to grow as more research highlights the better expected outcomes associated with AMA usage.
If you’re a plan sponsor looking to add an advisor managed account service to your retirement plan offerings, talk to your plan advisor or recordkeeper to see what your options are. If your recordkeeper has an AMA solution available, it is a fairly straightforward process to make the service available to your participants on an opt-In basis. However, if an analysis of your plan shows that participants would benefit from a plan refresh to a hybrid QDIA solution, this involves a little more effort, but can easily be coordinated. Another opportune time to consider applying a hybrid QDIA approach is if your plan elects to change its recordkeeper and the new recordkeeper has an AMA solution that can be used as part of a hybrid QDIA. Either way, target date funds and advisor managed accounts can be an effective pairing.
Sometimes, two really is better than one. Offering both target-date funds and advisor-managed accounts in one retirement plan can increase participation rates when one or both are used as the plan’s QDIA, and can help participants get better prepared to reach their retirement income goals. If you have any questions about AMAs or this combination strategy, please contact us.