As an industry, we tend to overcomplicate things, which can be to the detriment of those we serve—hard-working Americans saving for their future financial independence. It’s a result of being in the industry for many years, and then taking for granted that our end clients understand random terms like auto-escalate, QDIA, 408b2, and the vague “managed accounts.”
As we see it, this is not helping anyone. How do we fix it? Give workers not only what they need, but what they want. And, give it a name they understand.
We can start with the facts. More folks need access to a workplace savings plan, and those who do have a plan need help and advice. And by advice, we don’t mean just investment advice, but SAVINGS advice.
It’s fitting as we see that participants are hungry for more personalized solutions. Franklin Templeton’s 2023 Voice of the American Worker survey confirms that personalization goes a long way when it comes to the retirement savings behaviors of US workers. According to survey respondents, 78% of workers say they would be interested in more personalized 401(k) investment options tailored to their unique financial situation, while 77% confirmed a more personalized 401(k) investment option would encourage them to participate and/or contribute more to their retirement savings. And 75% responded that if their employer offered a customized managed account solution as an option in their 401k plan, they’d be more likely to stay in that plan if they retired or change employers. Of note, these statistics are emphasized even further for the Millennial generation, the largest portion of today’s workforce.
“I can change, you can change, we all can change” – Rocky IV
Target-date funds (TDF) have been a great benefit in recent decades, and they’ve done a great job helping many American workers save for their future, especially when used as a default or qualified default investment alternative (QDIA). However, we believe these vehicles have not evolved in a meaningful way since they became available in the 1990s—over 30 years ago. C’mon now—are your kids still playing Tetris on their Gameboys?
We view TDF’s as stagnant and stale, never giving employees the ability to update their goals, or ever recommending an increase in their savings rate, or do anything besides put employees in a box. Managed accounts can plan a role in supporting improved savings behavior; in fact, participants in a managed account on average participate at a rate 2% higher than those with a TDF,1 which may have a meaningful impact over the long term.
We believe we’re at the dawn of a mega-trend that will define the next decade or more of the retirement savings industry—PERSONALIZATION. It is all around us in our daily lives, so why isn’t it more widely available to 401(k) plan savers?
The solution we have is not new, it just has a name that sounds like an ancient tool used by old stock brokers: “managed accounts.” One of the most common misconceptions we hear is “managed accounts are just an expensive target-date fund!”
Today’s solutions address previous objections
We all have watched fees come down. For reference, we believe the all-in cost, including investment expenses of a blended investment menu (active and passive), can be less than 40 basis points (bps), which would include advice, technology and delivery fees. We believe getting those fees closer to 30 bps may even be possible.
Also, the technology is getting better and creating an improved user experience. So is the quality of data recordkeepers can provide to create an even more personalized experience for participants. It’s not Tetris, and it’s not a Gameboy they’re using.
All things being equal, especially price, wouldn’t most participants rather utilize a personalized portfolio than an off-the-shelf portfolio that does not use their unique goals (i.e., financial independence/what’s your number) as a key component of the decision-making process? We think so, and now’s the time to strategize on how we can best present these increasingly innovative solutions in a participant benefit-focused manner.
Can you change a name? It’s 2023. You can change anything.
We’re going to make a bold proposal. Our focus should be on personalization, not “managed accounts.” And let’s be clear with the terminology we use, since we know language matters. Let’s commit to using the word “personalized.”
Managed accounts can be a lot of things—a separately managed account in the wealth management world mainly. But what is it really in the 401(k) world? In our view, it is simply personalized savings advice and has very little to do with an “account,” which is just an operational vehicle.
So, how about we change the name to better describe the potential benefit it provides to today’s US worker? “Personalized advice” or “personalized solution” or even “personalized portfolio” all come to mind. Many options exist as we modernize our language, and it’s increasingly clear to us that the time is now to do so.
It’s time to be more descriptive about the type of solution we are providing: a personalized solution that helps many people achieve their number one goal: financial independence.
For additional information, please contact the Franklin Templeton Retirement Sales Department at (800) 530-2432 or visit https://www.franklintempleton.com/practice-management/workplace-retirement-solutions/index.
The Voice of the American Worker survey was conducted by The Harris Poll on behalf of Franklin Templeton from October 17th to October 27th, 2022, among 1,000 employed US adults. All respondents had some form of retirement savings. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. Findings from 2021 reference a study of a similar nature that was conducted by The Harris Poll on behalf of Franklin Templeton from October 16 to 28, 2020, among 1,007 employed US adults, and study from 2022 also references a similar survey conducted among 1,005 employed adults from Oct 28th to Nov 15th. Franklin Templeton is not affiliated with The Harris Poll, Harris Insights & Analytics, a Stagwell LLC Company.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
The investment risk of retirement target funds changes over time as their asset allocation changes. If a target-date fund invests in underlying funds, including exchange-traded funds (ETFs), which may engage in a variety of investment strategies involving certain risks, the target date funds are subject to those same risks. Investors should consult their financial professional for help selecting the appropriate fund of funds, or fund combination, based on an evaluation of their investment objectives, retirement time horizons and risk tolerance.
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1. Morningstar, “The Impact of the Default Investment Decision on Participant Deferral Rates: Managed Accounts vs Target-Date Funds”, 2019