Target date funds (TDFs) aren’t sophisticated enough to address the retirement needs of American workers. There’s a rising tide of workers retiring, and many of those workers don’t feel ready for retirement. Now more than ever, investors need customized, cost-effective income planning and investment strategies. Personalized managed advice can meet that need by providing better outcomes for investors than they would get with TDFs. There are a number of benefits for firms that offer personalized, managed advice, too.
First, let’s take a closer look at one way personalized advice provides better outcomes than TDFs.
The solid line in the graph below shows the asset allocation distribution of one asset manager’s age-based TDF glide path. Compare this to the individual dots, which represent personalized glide paths. These personalized glide paths account for all the asset manager’s underlying inputs, like capital market assumptions, asset class views, etc.
The graph shows how personalized managed advice proposes asset allocations that can differ from what investors would get from a TDF. This is because personalized managed advice considers a number of characteristics for each individual investor, while TDFs only consider an investor’s anticipated retirement year. With personalized managed advice, however, each investor receives a customized portfolio that accounts for other important details, like marital status and overall health.
Personalized managed advice also has benefits beyond personalized asset allocations. Some of these benefits include:
It also comes with opportunities to engage investors and provide them with further education. 60% of investors say they need better education about retirement planning, and TDFs aren’t well equipped to address that need, either. Personalized managed advice, on the other hand, provides investors with a plan that gives them a roadmap with concrete recommendations to help them reach their retirement goals.
Better outcomes aren’t just for investors. The technology that transforms TDFs into personalized managed advice can be used to deploy advice, too. Entire plan populations can be enrolled in bulk, for example. Trade instructions and confirmations can be automated, too.
This technology has other benefits beyond deployment. A solution that offers personalized managed advice—like NextCapital’s—can account for a plan’s defined contribution account types and restrictions. It can consider savings rules, employer match rules, and auto-escalation. And for IRA plans, it can automate and manage rollovers, partial withdrawals, distribution schedules, and restricted positions.
Multiple leading asset management firms have already transformed TDFs into personalized managed advice by partnering with NextCapital. These firms are now rolling out solutions that help provide better retirement outcomes and education for investors, and they benefit from technology that lets them more efficiently offer comprehensive, personalized retirement planning and advice.
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