Speaking on a panel at the 2012 PLANADVISER National Conference, Tom Skrobe, managing director, head of defined contribution distribution at BlackRock, noted that the role of an adviser for plans with TDFs is very important because the analysis and due diligence for the funds is different than for mutual funds. Advisers can help plan sponsors decide which approach they want to use: They could start with a simple, off-the-shelf product, but that may change as the plan evolves.
Joseph J. Masterson, SVP, chief sales & marketing officer at Diversified, contended that one of the best marketing opportunities for advisers is to offer analysis about whether a retirement plan’s current TDF solution is best for the plan’s participant demographics. Advisers can also offer to perform a due diligence search.According to Harold Bjornson, executive director of defined contribution investment solutions at J.P. Morgan, since TDFs were endorsed by the Department of Labor in 2006 and widely adopted in plans by 2008, plan sponsors are rethinking their initial decision about TDFs. They need advisers for benchmarking and understanding their TDFs’ fee structures.
There are considerations for advising funds about the use of custom TDFs. Bjornson said mega plans may want to use custom TDFs, but issues to consider are higher pricing, the mix of separate accounts with other funds being hard to unitize, and whether there is additional fiduciary responsibility from creating a custom solution.
Skrobe added that advisers should ask plan sponsors what problem they are trying to solve by using custom TDFs. Does the plan sponsor want more control over the asset allocation and glide path? Is the plan sponsor trying to mirror defined benefit (DB) plan investments for participants who do not have access to the DB plan?These may be good reasons to use a custom solution, he said.
Masterson said there are software packages offered by some recordkeepers to help develop custom solutions with low fiduciary risk. Most use the plan’s core investment lineup to create custom TDFs. “If you stick with the core lineup of funds, I feel comfortable you can develop custom TDFs for any size plan that could meet the need of all participants,” he told conference attendees.
However, Bjornson noted that using an open architecture investment platform will help build a TDF that will not crash with the market because you could add such investments as treasury inflation-protection securities (TIPS) that would not be in a plan’s core investment lineup.Skrobe suggested that advisers ask if they can make money advising about custom TDFs. Can you get compensated for the additional time and effort, or should you just stick with already-established products?