Getting investors retirement ready: transforming target date funds into personalized advice

​It’s becoming more apparent that despite the broad adoption and dominance of the $1.7 trillion Target Date Fund (TDF) product, TDFs don’t address the trends and issues that are becoming more urgent for American workers. When it comes to both the increased lack of retirement readiness and the shift in the growing base of retirees that need income distribution advice, TDFs aren’t doing enough. 

​According to recent research, most workers say that they’re worried about their retirement readiness, and nearly 1 in 4 don’t think they’ll ever be able to retire. Additionally, 32% of people ages 65-69 are still working, up from 22% in 1996. The number of people reaching retirement age is also increasing—now an estimated 10,000 per day—and this number will increase over the next decade.

Target Date Funds don’t offer the personalization and flexibility needed to meet workers’ growing and complex retirement needs. This looming retirement crisis can be better addressed by transforming TDFs into personalized managed advice. It’s now possible for asset managers to leverage the same investment research they use to create TDF products to create personalized managed advice and planning at scale. This same methodology can also be extended out of plan accounts to provide more holistic advice and planning to IRAs and other account types. And if it’s scaled to address the entire TDF market, personalized managed advice can be priced to compete with TDFs.

NextCapital is leading the way when it comes to transforming TDFs into personalized managed advice. Multiple leading asset management firms have already made this transformation using NextCapital technology, and they’re now rolling out solutions that will enhance the retirement readiness and retiree decumulation needs of America’s workers.  

More specifically, a personalized asset allocation and plan addresses key issues related to retirement readiness and personalized distribution strategies for retirement. TDF personalization allows for consideration of a multitude of investor data points, including:

• Gender and marital status
• Health, education, salary, and career risk
• Outside assets 
• Social security, pension, and other incomes

Using these investor characteristics, personalized managed advice generates:

• Portfolio advice and glidepath
• A personalized retirement plan available online and/or in PDF
• Savings and retirement age advice
• Withdrawal plan

Keeping in mind the two primary issues with TDFs—lack of retirement readiness and distribution options—our research has enabled us to compare the results of TDFs and managed advice. When TDFs are transformed into managed advice, participants typically see the following benefits:

• A personalized asset allocation that focuses on enhancing returns or decreasing risk, depending on the participant’s situation 
• Savings advice that increases wealth and income in retirement
• Retirement age advice that optimizes retirement income and Social Security
• Distribution targets that include outside assets and income sources
• Distribution targets that are after-tax and sustainable for personalized life expectancy
• Distribution targets that are tax-aware

 
In our next post in this series, we’ll explore how one of these benefits—personalized asset allocations—provides participants with better outcomes by adjusting their asset allocations based on each participant’s unique characteristics.

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