The ubiquitous target-date funds found in almost all 401(k) plans are stepping up their game.
Now, for just a few basis points more, retirement savers can have a personalized target-date fund, meaning the asset allocation in their funds will reflect more than just their age.
These new personalized target-date funds will also factor in things like a saver’s income, their deferral rate and employer contributions in an effort to develop a more precise asset allocation that is better aligned with each saver’s unique circumstances.
Today, investors in the same vintage (or year) of a traditional target-date fund all have the same allocation to stocks, bonds and other asset classes. With a personalized target-date fund, investors will each have a different or individualized asset allocation.
“It feels like not all 35-year-olds, not all 45-year-olds, and not all 55-year-olds are the same,” said Craig Duglin, senior vice president of institutional retirement product management at Capital Group, which recently rolled out its own personalized target-date fund called Target Date Plus.
Some 35-year-olds have a lot of savings, while others have no savings at all. Some earn high incomes and others low, making a standard asset allocation for all 35-year-olds less effective for some, Duglin said.
The firm’s new Target Date Plus addresses the issue by incorporating additional data points beyond an individual’s age, making it, in effect, a more cost-effective version of a managed account.
Expense ratios
The personalized fund costs 5 basis points more than the firm’s traditional target-date fund and factors in five data points: an individual’s age, salary, account balance, deferral rate and employer contribution.
Capital Group’s traditional active target-date funds, which Duglin says are the least expensive in the marketplace, have an average expense ratio of 35 basis points for its most commonly used R6 mutual share class.
“Five basis points feels like a really good value for that level of customization,” Duglin said, explaining that Target Date Plus delivers essentially the same personalized portfolio that managed accounts deliver.
The use of managed accounts in retirement plans has been ticking up steadily over the past decade. In 2021, almost half of plan sponsors (48.8%) offered a managed account in their workplace retirement plans, up from 33.9% in 2011, according to data from the Plan Sponsor Council of America.
Personalized target-date funds cost less than managed accounts, which run anywhere from 25 basis points to as high as 85 basis points. They also provide the personalized allocation automatically without any input from participants as managed accounts attempt but don’t always manage to do.
“Unlike managed accounts, they don’t need participants to interact and provide data and update it constantly, which has proven to be a hurdle for managed accounts,” said Rene Martel, a managing director and head of retirement at Pacific Investment Management Co.
PIMCO rolled out a personalized target-date fund called myTDF in the first quarter of 2023, which factors in the same five data points that Capital Group’s Target Date Plus does.
“What we try to do is to offer it very close to the cost of an off-the-shelf target-date fund,” Martel said. “There’s a few basis points difference in terms of the participant cost between the personalized version and the off-the-shelf version.”
Since going live on the record-keeping platform of Voya Financial in the first quarter of 2023, 70 retirement plan sponsors have adopted the personalized target-date fund, according to Martel.
“I think it’s a good indication that there’s interest for it,” he said. “We're pretty encouraged after just a few months.”
Capital Group’s Duglin is also optimistic, saying that plan sponsor interest and curiosity are very high, with many seeing the products as an intriguing concept. Since going live with Target Date Plus on the record-keeping platforms of Ascensus and Voya in February and March, the firm has crossed into “the double-digit number of plan sponsors” adopting it, Duglin said.
Both Duglin and Martel noted that they do not have access to the participant data used to create the personalized asset allocations. The five participant data points utilized are provided by record keepers directly to Morningstar Investment Management, the advice engine that PIMCO and Capital Group use to build the personalized funds.
“The target-date fund manager is not in possession of that personal data. It just stays at the record keeper,” Martel said.
Principal Financial Group, a record keeper with an asset management arm, is also betting on the opportunity. It is developing its own proprietary personalized target-date fund that goes a step further by also incorporating data points from individuals’ defined benefit plans and nonqualified deferred compensation plans.
The additional data is important because individuals with a sizable defined benefit plan may “need less fixed-income exposure” and those with a nonqualified plan “may need less equity exposure” than would otherwise be the case if they didn’t have these revenue streams, said Brett Fisher, head of investment product strategy for retirement and income solutions at Principal.
“That’s where our platform will probably differ from some of the other offerings out there in the marketplace,” Fisher said.
Fisher expects the new personalized target-date offering to launch in the first quarter of 2025. He estimates that the product will cost about a quarter of the cost of a managed account.
“I think you’ll see from Principal that the cost is in the single digits,” he said.
QDIAs
If PIMCO’s myTDF is any indication, retirement plan sponsors adding a personalized target-date fund to their lineup are likely to select it as the qualified default investment option.
“The clients we have on the books right now most commonly offer the personalized version as the QDIA,” PIMCO’s Martel said.
A small number of plans kept the traditional target-date fund as the QDIA with the personalized version as an opt-in choice. In a few rare cases, plan sponsors chose the traditional target-date fund as the QDIA for the early part of workers’ career and then shifted to the personalized option in their later working years.
For Capital Group’s Duglin, it’s too early to predict how and whether plan sponsors will use the new funds.
While interest in the new personalized funds is high, he is betting that traditional target-date funds will continue to represent the most common QDIA selection.
“The short-term future is going to be single-glidepath QDIA solutions,” he said, referring to traditional target-date funds.
However, he added, the conversation around personalized target-date funds “always catches people’s attention and people are leaning into the conversation.”
