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Embedded Advice Solutions Offer Dual Benefits
for Sponsors and Participants
The retirement plan landscape and needs of participants
are constantly evolving. Consider the evolution of
investment strategies. In the early days of retirement
plans, participants had few investment choices from
which to choose. As more investment options became
available, many participants felt overwhelmed by their
investment decisions. This challenge led to innovative
investment vehicles that include embedded advice
solutions, such as target-date funds, managed accounts
and custom model portfolios. Successful retirement plan
advisors understand the intricacies of the various
options and how to clearly communicate them to plan
sponsors when offering plan guidance. Knowing which
option is best for your clients and their participants
can set you apart from the competition.
According to a study conducted by the Profit Sharing
Council of America in 2009, defined contribution plans
offer an average of eighteen investment options. For an
unsophisticated investor, this may be overwhelming.
Target-date funds continue to grow in popularity because
they provide a simplified approach to investing and have
also become a mainstay for Qualified Default Investment
Alternatives (QDIAs).The percent of plans offering asset
allocation funds, including target-date, grew from 63%
in 2006 to 85% in 2010. The percentage of participants
who used the funds grew from 15% in 2006 to 26% in
2010*. In just four short years, the adoption of
target-date funds has dramatically increased. One way to
differentiate yourself is to help plan sponsors and
participants compare and contrast different types of
target-date funds and their potential benefits and
risks.
As a result of the recently proposed SEC rule changes
addressing the marketing of target-date funds, it is
imperative to understand and clearly communicate the
material differences of various target-date fund glide
paths and landing points (i.e.,” To” or “Through”
Retirement). “Through Retirement” funds maintain greater
equity allocations longer than “To Retirement” options.
The glide path of the “To” funds ends at retirement age
(the date listed in the fund name) whereas the glide
path of the “Through” funds extends beyond the
retirement date. Typically, an investor in a “To”
retirement fund would transition into the suites most
conservative portfolio by age 65, and in a “Through
Retirement” fund this does not typically happen until
age 85. It is priority number one to ensure your clients
fully understand both strategies and the potential
benefits and risks associated with each. Successful plan
advisors will begin incorporating “To” versus “Through”
target-date discussions as standard practice in their
client and prospect meetings today. Establish your
credibility with prospective and existing clients by
helping them select the approach that is best suited for
their employees and their investment objectives.
Beyond target-date funds, we are also seeing an uptick
in utilization of advice solutions such as managed
accounts. For the first time ever, more plan sponsors
than not, are offering advice solutions. According to
the Profit Sharing Council of America 2009 Annual
Survey, 51.8% offered some type of advice feature. If
you are having discussions with your clients, you may
want to also share with them that more small companies
offer advice than large companies. Participants clearly
respect and want professional advice and you have the
opportunity to help provide them access by speaking to
your plan sponsor clients about offering the feature as
part of their retirement plan. The most personalized
approach would be for you to sit down with each
participant to help them create a customized strategy
tailored to each individual’s retirement objectives.
When that option is not available, you may want to speak
to your plan sponsor clients about offering the feature
as part of their retirement plan. Embedded advice
solutions have provided the dual benefit of supporting
participants by simplifying their investment choices and
in some cases offering fiduciary protection to plan
sponsors.
Look for upcoming articles by ING in the 401kExchange Weekly Newsletter. In our
next article, we’ll share what our research and
experience has told us about mobile innovation and the
types of technologies advisors may want to be thinking
about to communicate with their clients.
*Source ING Internal Data August 2010
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