The Evolving ‘Face’ of Investment Models

For years, target-date funds have served as the default investment solution for most Americans’ defined contribution plans. Nearly half (49.5%) of all plans surveyed in this year’s PLANSPONSOR Plan Benchmarking Report offer TDFs, and 66.3% of plans using automatic enrollment have TDFs as their default investment. But as technology, data availability and participant engagement evolve, a growing chorus is predicting that the future of default investing will likely be more personalized—a sentiment shared by panelists from Vanguard, Capital Group and Strategic Retirement Partners speaking at the recent PLANSPONSOR National Conference in Nashville, Tennessee. PLANSPONSOR, like PLANADVISER, is owned by ISS STOXX.

Industry experts say managed accounts and similar products are unlikely to overtake TDFs as the most-used default, but sources pointed to a future in which retirement savings products take more data points into consideration than just when someone expects to retire—or turns 65.

“I would characterize it as an evolution, rather than a wholesale move away from target-date funds,” says Cameron McCarthy, head of OCIO retirement and insurance at Morgan Stanley Wealth Management. “Target-date funds remain an extraordinarily successful solution and the dominant default in defined contribution plans. What is changing is that sponsors are increasingly asking whether age alone is enough to determine the right retirement strategy for every participant.”

How the Market Has Progressed

An increasing number of legacy asset managers are offering managed accounts, which allow for more personalization in retirement portfolios by including risk tolerance and goals. Franklin Templeton, for instance, acquired startup volScout in 2023 to expand its managed investment strategies, and Fidelity Investments recently launched six new custom strategies and two new model offerings. Forty-seven percent of plans now offer professionally managed account services, according to the PLANSPONSOR report, and when plans were asked if they anticipate offering managed accounts in the future, 50% remained unsure.

While the Defined Contribution Institutional Investment Association is seeing more personalized offerings, “I’d stop short of calling it a challenge to target-date funds,” says Chief Strategy Officer Katie Selenski. “So far it looks more like TDFs absorbing personalization than losing ground to it.”

Selenski says one of the most active innovations right now is personalization built directly into a TDF. Some products launched in the last few years use up to 10 participant data points to customize allocations while keeping the fund eligible as a qualified default investment alternative. Managed accounts as stand-alone, opt-in offerings have seen mixed uptake across the industry and plans, Selenski adds. In the past few years, some plans have terminated their managed account services, she says, driven by fiduciary fee scrutiny and the inherent challenges in benchmarking value.

What Is Driving Personalization?

A major reason behind the creation and adoption of more personalized products is an increase in the availability of data. Recordkeepers can now capture a handful of basic but useful data points without any need for direct participant engagement, which was not broadly the case a decade ago, Selenski says. Advanced technology means those large amounts of data can more easily be turned into individualized and personalized insights, and data are showing it is paying off: increase the median wealth-to-salary ratio at age 65 by 5.9% for TDF investors and by 11.4% for DIY investors.

Technology has also freed up time and resources for the human advisers with whom participants are eager to connect. At Edelman Financial Engines’ engagement center, which makes advisers available for participants to call, for instance, much of the administrative work. such as notetaking and meeting preparation, can be done by machines.

“That allows the humans to interact [with] questions, concerns, goals, [and by] explaining different things [related to] risk, the investment process and what retirement means,” says Michael Liersch, Edelman Financial Engines’ chief planning officer. “The rise of the machines enables humans to do what humans do best, and then machines to do what machines do best. “

According to Duane Bernt, CEO of Stadion Money Management, participants have a hunger to engage with experts and are looking for professionals to help them manage their money, just as they look for help in other aspects of their lives.

“If you want to get in shape but don’t know what to do at the gym, you may hire a personal trainer,” Bernt says.

Barriers to Broader Implementation

One of the major barriers to increased use of more personalized products is inertia. TDFs have established themselves as the cornerstone of retirement savings, and getting participants excited about new products is hard to do.

“There is an inherent idea that ‘if everyone is using TDFs, shouldn’t we?’” Bernt says.

Another roadblock is the need to deliver added value to account for the added costs. Managed accounts typically come with fees of at least 25 basis points, while fees for TDFs can be as low as 4 basis points, according to Chris Brown, the founder of and a principal in Sway Research.

“[Managed accounts] have got to deliver either better performance or some lower downside risk, and I’m not sure they’ve really done that consistently or … enough,” Brown says.

It is also difficult to benchmark the added value of a personalized product, since every individual’s needs are different.

Another barrier to implementation, Brown says, is the impressive performance of the stock market. Generally, retirement savers with TDFs are happy with their results, and it could take a severe market correction like that of 2008 for participants to question whether they need a change. Last year, assets in target-date strategies grew to $4.8 trillion—a 20.3% increase over the prior year—as the stock market buoyed portfolio values, according to Morningstar.

“As the market keeps rising, it’s tougher for these other products like managed accounts to really get a foothold against target dates,” Brown says.

Finally, McCarthy says that . While recordkeepers generally have “excellent” information about the participant’s current plan, they typically know much less about outside assets, a spouse’s retirement savings, pensions, household finances or expected retirement spending. Plus, sponsors also have to be comfortable with how participant data are being used.

One Size No Longer Fits All

TDFs are not going anywhere, thanks to the simplicity they offer in giving participants a professionally managed portfolio based on a single piece of information—when they plan to retire. But the next generation of these asset allocation vehicles, McCarthy says, asks whether the simplicity of the TDF can incorporate some few additional pieces of information that materially affect the appropriate strategy.

He predicts that in five years, target-date strategies will still represent a very significant portion of DC defaults. But the meaningful difference may be that the default becomes less static, more personalized and will include additional features.

“I also expect the default to increasingly address the transition through retirement, rather than ending its job at retirement,” McCarthy says. “The accumulation and decumulation conversations are starting to converge.”