There are more ways for defined contribution plan participants to gain access to professional investment management than by defaulting them into target-date funds or using a separately managed account. Chris Costello and his fellow partners want blooom, a relatively new algorithm-based DC plan asset management service, want to be one of them.
Since its founding in 2013, Overland, Kansas-based blooom has collected 745 plan participant clients whose DC plan assets collectively total nearly $90 million. The average account size is $120,000, and the average participant age is 39.
Do it for you
This is a do-it-for-you solution, says Costello, bloooms CEO. The service costs participants with at least $20,000 in assets $15 per month, and $1 month for participants with less.
For that price, the participants assets are managed in a fashion somewhat similar to a target-date fund, but using the investment options available within the participants 401(k) plan. Bloooms system is based on 16 different asset classes. The asset allocation is adjusted as the projected retirement date nears. However, bloooms glidepath differs from those of the largest TDF providers.
Plan sponsors play no role; participants merely delegate legal authority to blooom to direct their investment selections using available options within the plan. Blooom, using an intermediary service, taps into participants accounts online to make periodic portfolio adjustments. (Assets remain with the plans custodian.)
Bloooms pitch to plan sponsors? That they can (if they pick up the tab) offer employees a unique benefit, increase participation, minimize plan costs, and minimize participant [investment] mistakes, among other claimed benefits. In theory, sponsors might gain some of those benefits simply by letting participants know the service exists.
Bloooms asset management system operates using two variables provided by participants: the number of years before their planned retirement, and the level of volatility they are willing to tolerate. They can default into an average risk profile if they choose, and more than 90% do so.
A third driver of the systems investment selection process is using investment options within the same asset class that have the lowest management fees assuming there is more than one choice, of course.
Incorrect retirement investing
The vast majority 83% of participant accounts are invested incorrectly when blooom first analyzes participants accounts, according to the company. (DC plan participants can have blooom analyze their current asset allocations without charge, and 20% of those who do so wind up subscribing to the blooom service, Costello says.)
Why would participants be better off using blooom than the (presumably) available target-date fund option?
We know from the data that people arent using TDFs correctly, says Costello. They will put some money in a TDF, and then more in, for example, an emerging market stock fund. That pattern suggests participants do not understand that a TDF is built on the foundation of optimum asset allocation which presumably would include exposure to emerging market equities.
Another advantage Costello asserts blooom has to offer is what he considers a more appropriate glidepath for relatively younger participants. A lot of the TDFs have way too much in bonds and cash when participants anticipated retirement is many years into the future, he says.
For example, in bloooms model, participants 20 years out from retirement would have a 100% equity exposure. In contrast, Vanguards 2035 fund currently has an 82/18 stock/bond mix. Fidelitys 2035 Freedom Funds mix is 94/5 and 1% in cash. Similarly, bloooms 10-years-to-retirement mix is 80/20, while Vanguards is 68/22 and Fidelitys is 63/24/3.
Richard Stolz is a freelance writer based in Rockville, Maryland.
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