Will TDF Series Based on ETFs Become the Norm?

More investment providers are now using ETFs within glide-path-based portfolios, but the business development leader at Stadion says his firm has long embraced the approach, as exemplified by the new TargetFit product launch.

Sitting down with PLANADVISER to discuss his firm’s recent target-date fund (TDF) product launch and wider industry trends, Todd Lacey, chief business development officer at Stadion, said the key theme of the TargetFit TDF line is flexibility.

“These new strategies are coming at a time when the vast majority of target-date products available offer only one glide path,” Lacey observed. “The reality is retirement plan sponsors and their participants are looking for investment solutions that are more tailored to their individual needs.”

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Plugging for his firm, Lacey said he is “excited to see what traction TargetFit will gain in the retirement market in the months and years to come.” In short, the solution offers three levels of risk within the same TDF family, leveraging exchange-traded funds (ETFs) wrapped within collective investment trusts (CITs) to keep costs as low as possible. 

Lacey acknowledged the fact, raised by some researchers and industry analysts, that an increasing number of managers have chosen to offer additional “flavors” of target-date fund products in response to various stimuli, resulting in a saturated marketplace in which it can be difficult for new products to gain significant assets. Indeed, recently firms with long-standing active target-date series have launched indexed or blended funds, using elements of both active and passive investing, while other target-date series have been launched to serve other purposes. Against this backdrop, Lacey voiced confidence that the best products will always gain the most assets, even in a crowded marketplace, and so he downplayed the risk of this new launch failing to catch on or cannibalizing assets from the firm’s existing products.

What makes the TargetFit line a new and unique product, he said, is that the glide paths utilize a series of carefully tailored components in different blends designed to offer varying levels of risk exposure. The three underlying components are labeled Strategic Equity, Strategic Fixed Income and Flex. The Strategic Equity component “remains fully invested in equity positions at all times, while retaining the ability to strategically adjust the allocation among various equity positions.” The Strategic Fixed Income component “remains fully invested in fixed-income positions at all times, while retaining the ability to strategically adjust the allocation among various fixed-income positions.” The Flex component is “actively managed between equity positions, fixed-income positions, and cash/cash-equivalents depending on the risk level of the market as determined by Stadion’s proprietary Short Term and Long Term models, which are each applied to 50% of the Flex.”

The complementary structures of the underlying investments allow the firm to offer three distinct glide paths in the TargetFit line—one conservative, one moderate and one aggressive. Naturally, this approach is meant to allow participants to have highly tailored portfolios that more closely match their individualized risk tolerance and time until retirement. In a bid to keep fees as low as possible, the firm used ETFs as the primary underlying investment vehicle, Lacey confirmed, and the TDFs can operate in “multiple open-architecture platforms” because they are wrapped in collective trusts. 

NEXT: Offering both managed accounts and TDFs

One interesting aspect of Lacey’s job is that he is tasked with overseeing both Stadion’s TargetFit TDF offering as well as the nearly 2-year-old StoryLine managed account product set. As Lacey spelled out, it was not all that long ago that investors who were automatically enrolled into retirement plans were almost exclusively placed in stable value funds, or perhaps money market funds—investment approaches deemed to be safe and prudent for any of the small number of people actually defaulted into retirement plans pre-Pension Protection Act.

Today, nearly a decade after passage of the major reforms in the PPA, the steady stream of highly customizable products and services targeted at automatically enrolled defined contribution (DC) plan participants tells a different story. A wide variety of investment providers—from the most passively minded indexing specialists to more daring tactical managers—compete for the coveted qualified default investment alternative (QDIA) slot on retirement plan menus. The firms offer a huge variety of philosophies about what approach is best for “auto-participants.” Sometimes today, the conversation is framed as “managed accounts or TDFs, but not both.”

Lacey said Stadion has reached the conclusion that “it is not a matter of managed accounts vs. TDFs.” In fact, at his firm the two approaches are highly complementary and help the firm serve a much broader range of participants than could be reached previously with just the StoryLine managed accounts. The reason for this, as Lacey candidly explained, is that the major recordkeepers today are absolutely swamped with backlogged client requests and the daunting task of updating their offerings and meeting the challenges of fee compression and regulatory uncertainty.

“We have established some great relationships with some of the big recordkeeping providers, but frankly in this environment it is increasingly difficult, even when they really like our product, to prioritize even the small amount of development work that will go into adopting our managed account product,” Lacey said. “In response, we have shifted our strategy and have been finding success going to smaller, regional and independent recordkeepers. They can be more nimble, and they have helped us expand the footprint of the StoryLine managed accounts.”

Lacey described the TargetFit launch as a complementary strategy in that the TDF products will be widely available on essentially any open-architecture recordkeeping platform. “This allows us to bring the philosophy of tailored service and personalization of the StoryLine managed accounts to a much broader audience investing in TDFs.”

Latinos Need Retirement and Financial Planning Assistance

Fifty-nine percent are unsure about who to go to for financial advice and guidance, a survey finds.

More than half (71%) of middle-income Hispanics feel they are behind on preparing for retirement as opposed to 63% of the general population, according to a recent study commissioned by Massachusetts Mutual Life Insurance Company. However, the survey also found that 63% of Latinos wish their employers would provide a greater degree of education on saving for retirement.

The Mass Mutual Hispanic Middle America Financial Security Study also shed some light on the types of financial services Hispanics are seeking from their employers. About 79% want financial planning services, 70% want Social Security counseling, 68% want budgeting assistance, and 54% want tuition reimbursement. Each of these options was preferred by a larger percentage of Latinos than people among the general population, the study found.

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Hispanics may also be more welcoming of professional financial advice. The study revealed that while 49% of the general population said it’s inappropriate for their employers to be involved in their personal finances, this sentiment was shared among only 38% of Hispanics. Moreover, 53% of Hispanics said they felt financial companies wanted to help people like them.

“It is no surprise that our study found that Latinos in the workforce would welcome additional financial help and guidance from their employers,” says David Hufnagel, Latino market director, MassMutual. “In fact, our research revealed that Latinos show much more interest in employer-offered financial planning/counseling services, especially budgeting assistance and debt counseling, than other consumer segments.”

These services can help this segment of the population address vast concerns that are threatening their financial wellness. The study found 49% of Latinos say they don’t understand how to save and invest appropriately for their situation, and 43% struggle to make ends meet. Moreover, three in 10 say they have less than $500 saved for emergencies. Only 5% had $50,000 or more saved for emergencies and 17% had virtually nothing saved at all. About 37% of Latinos said managing household finances was at least somewhat difficult, and 51% cited high levels of debt. In fact, debt and bills topped the list of financial concerns among Latinos. More than half say they worry about household finances at least once a week.

And these worries are bleeding into other aspects of their lives. The MassMutual study found 64% of Hispanics say financial issues are harming their mental health and raising stress levels, 42% say it’s interfering with their social lives, and 36% say it’s hampering their ability to eat healthy.

Some research suggests financial wellness programs are key to alleviating workers’ stress which could significantly impact productivity and a company’s bottom line.

However, many Latinos have difficulty securing the financial services that can help them address these issues. The survey found 59% are unsure about who to go to for financial advice and guidance, 53% say it’s difficult to find financial services companies that know how to help households like the ones they belong to, and 42% believe they have different financial planning needs than the average American household.

“Securing a good financial future requires saving and planning,” says Hufnagel. “We want to empower families with resources and tools to help achieve their financial goals and prepare financially for the long-term.”

Based on its research, MassMutual recommends employees develop monthly budgets and reallocate priorities for short and long-term financial planning and saving; start saving for retirement as soon as possible; and use digital tools to determine how much they can expect to save in order to secure a comfortable retirement.

MassMutual’s Hispanic Middle America Financial Security Study was conducted by Greenwald & Associates on behalf of MassMutual from February 28 to March 14, 2017. Respondents were between the ages of 25 and 65, worked full-time, and had a household income between $35,000 and $150,000. 

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