What’s the value of managed money in 401(k)s?

Posted by Mark Piquette on June 3, 2014

41% of advisors who attended the Genius Session said advisor knoweldge is the biggest hurdle for managed strategies in 401(k) plans.

For much of its 30-year history, the 401(k) industry has been slow to respond to the needs of plan participants. A 2013 survey by JP Morgan is proof positive of this fact. Half of plan participants surveyed by JP Morgan indicated that they did not have the skills or expertise to manage their own retirement, yet only 25% of 401(k) plans include professional money management. Ken Tucker, Vice President of 401(k) Operations at Trust Company of America, explained in a recent genius session how the 401(k) industry is better addressing the needs of plan participants, and how Trust Company of America can help advisors maximize the value of 401(k) plans they manage for clients.

The target date fund marked the industry’s first attempt to provide plan participants with the professional management they need. The concept of the target date fund is simple enough: the fund name includes a number—65, for example—corresponding to the age at which the investor plans to retire. Risks and returns are customized according to that investor’s age profile.

But target date funds are more complicated than they appear. For one, a mere preposition—to or through—has significant ramifications for how the fund should be treated.

  • "To” funds are designed for investors who are saving for a particular retirement date, with the goal of getting to that date without significant withdrawals from their nest egg. These investors seek retirement funds that reduce riskier investments, such as stocks, as they approach the target date, which could limit the potential for growth.
  • "Through” investors and funds are designed to increase savings “through,” retirement and are more likely to allocate a larger percentage of their holdings to stocks and other riskier investments, even though they could face a bigger risk of losses.

Unfortunately, investors have a tendency to misuse target date funds, splitting allocations between two TDFs with different retirement dates or inadequately diversifying their portfolios with other funds.

The industry’s second attempt to address the needs of plan participants was the model. In this approach, mutual funds within the 401(k) are split into different groups according to risk tolerances: aggressive, moderate or conservative. Unfortunately, models have their own problems. Disclosure rules make it difficult to manage models in response to market conditions, as Department of Labor regulations require 45-60 days to provide disclosure statements for new funds. Moreover, providing disclosures is a significant administrative burden for both plan sponsors and advisors.

Trust Company of America avoids these problems by making the model itself the designated investment alternative. The recordkeeping platform is integrated into the custody platform, allowing advisors to manage models—and all of their underlying assets—without providing additional disclosures. The TCA solution also includes a greater diversity of investment options than a plan participant would have managing his own 401(k). Its intuitive design allows advisors to focus on delivering value to clients through excellent service and money management, rather than being burdened with administrative duties.

For more information on how TCA can help advisors and their clients maximize the value of their 401(k) plans, visit www.trustamerica.com/ria-technology/ria401k.

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