Target-date funds continue to increase in popularity among investors as low-cost retirement vehicles, at the same time the Internet and increased benchmarking have made the retirement industry more transparent than ever. With these trends in mind, employer client expectations of their retirement advisers have raised.

“The trend [with target-date funds] is continued growth. Over the last year or two, there has been a continued re-evaluation of target-date philosophy and making sure that plan sponsors have the right target-date funds and that they understand how their target-date fund operates, what the goals of that product are, and making sure that it aligns with their goals as plan sponsors,” explains Craig Keim, director of defined contribution investment relationship management, T. Rowe Price. “Target-date funds have become the core building block of most investment lineups. It’s the QDIA of choice for most plans and is the focal point and the core of their investment lineup,” he adds.

As such, the role of advisers has expanded in this arena. “Whether from a vendor selection standpoint or an investment selection and monitoring standpoint, more and more sponsors are relying on their brokers and advisers more than ever," says Keim.

After more than two decades of investors using unbundled products, the turn of the century saw a back-to-basics trend, says Fran Kinniry, principal in Vanguard’s Investment Strategy Group. While TDFs have an appealing design for the participant, they have great complexity in the fund itself, which maintains the need for a skilled broker to manage them.

For example, Kinniry, speaking for Vanguard funds, says, one fund could have both U.S. and non-U.S. equity securities and fixed income securities. Also, since many investors have issues with rebalancing, Kinniry says, the beauty of the target-date fund is that this feature is built in.  

“One of most beneficial things about target retirement funds is that they don’t engage in market timing,” says Kinniry. “Research shows that trying to predict or changing your asset allocation based on what you think will happen in the market has not been very productive.” 

He adds that certainly there will be nuances within any population, but it’s not wise to control for those. In general, consultants and advisers evaluate their client’s demographics so that the target-date product makes sense for them, rather than to target just a subset of that demographic.

Plans of the future

T. Rowe Price’s Keim predicts DC plans will eventually become the sole retirement vehicle for most participants. “The industry is looking at target-date products not just as an investment and asset accumulation vehicle, but focusing on the retirement income possibilities,” he says. “It’s pivoting from just being an investment option in your menu to looking at it holistically as a possible provider of retirement income."

According to Jake Gilliam, managing director, Charles Schwab Investment Management, plan sponsors want “open architecture target-date funds, rather than proprietary funds, more plan adoption of funds that blend both active and passive investment strategies, and a relentless focus on driving down fund investment costs.”

He adds that “forward-thinking fund managers are looking beyond equity/fixed income weights as the primary means of managing risk. They are using more sophisticated risk management methods such as adjusting levels of active and passive risk, and lowering exposure to volatile asset classes within both equity and fixed income as investors near and enter retirement.”

The role of the broker has shifted along with the changing investor climate, which relies much more on benchmarking. Traditionally, advisers’ value proposition was solely around stock selection and market rotation, “which worked for 50 or 60 years when there was no transparency and their client couldn’t compare it to anything," says Kinniry.

The Internet, transparency and benchmarking have changed the value proposition of advisers. “Now the value proposition has changed much more toward a financial steward — being the professional adviser, recommending as a fiduciary what’s best in class — which is a much more sustainable and valuable," Kinniry says.

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