Should you take the bus or drive? Order your restaurant meal prix fixe or ala carte? Buy a suit off the rack or tailored from scratch?
There are many approaches and choices to buying the goods and services we need and it’s no different when selecting investments for a retirement plan. But the choices are sometimes not as clear, especially when it comes to choosing between target date funds (TDFs) and managed accounts for the plan’s investment line-up.
Retirement plan sponsors often ask MassMutual whether their retirement plan should offer TDFs or managed accounts. The short answer is, “yes.”
That’s because the decision is not mutually exclusive. While TDFs and managed accounts have similarities, they also have important differences that appeal to different retirement plan participants.
Both TDFs and managed accounts provide investors with guardrails along the road to retirement, automatically reallocating investments between different asset categories as savers approach their ultimate destination. These allocation strategies, often referred to as “glide paths,” typically shift investments away from stocks towards bonds and other more stable assets as savers get closer to retirement.
But there are important differences, just like there are similarities and differences between cars and buses. Both have wheels. Both travel along roads towards the same destination. But the comparison ends there as buses and cars accomplish their objective in different ways. Like TDFs and managed accounts, it’s the details that make all the difference.
TDFs, also known as lifecycle or age-based funds, typically assign an asset strategy based on a retirement plan participant’s age. For example, a millennial with 35 or 40 years before retirement might invest in a 2045 or 2050 TDF with up to 90 percent of its assets invested in stocks. Millennial’s longer time horizon before retirement helps mitigate the risk associated with more volatile stock market returns while providing long-term growth potential.
Conversely, someone in their mid-50s might select a 2025 or 2030 TDF with half as much exposure to stocks and a larger allocation to investments with fixed or conservative returns. People who are closer to retirement don’t have as much time to recover from market volatility and may prioritize protection over growth of their assets.
MassMutual offers several co-manufactured choices of TDFs on its recordkeeping platform, including active, passive and combination or hybrid management offerings: the MassMutual RetireSMART by J.P. Morgan Target Date Funds and MassMutual Select T. Rowe Price Retirement (active management), Index Select managed by Blackrock (passive management), and the Legg Mason Total Advantage Funds (hybrid management).
The investment strategy associated with TDFs is relatively straightforward, offering the same approach for every investor of the same age. Very much like taking the bus. You climb aboard, find a seat and then ride until you reach your destination.
But like some drivers, some investors want a more refined and personalized approach. They want to take other factors into consideration, accounting for whether they have a pension or other retirement plan, consideration of other invested assets as well as their individual risk tolerance. Addressing a more complex set of investment needs may call for professional assistance in selecting an asset allocation strategy found in a managed account.
With a managed account, a financial professional selects investment funds based on several factors, including, but not limited to the retirement saver’s risk tolerance, analysis of personal debt and assets, other available retirement assets such as a pension, IRA or a 401(k) with a former employer, as well as his or her budget, life-stage and geographical location.
Selecting a managed account is more like buying a car and choosing from a menu of options that help customize the ride and the journey going forward. And, like a car, more customized options tend to mean a higher price. Managed accounts sometimes have higher fees than TDFs, another factor to consider in the selection process.
MassMutual’s RetireSMARTSM Ready Managed Path managed accounts are managed by Envestnet Retirement Solutions, LLC (ERS), a registered investment advisor that is not affiliated with MassMutual or any of its subsidiaries. ERS builds the managed account investment strategies for each participant using the investment options already available through the individual plan sponsor’s retirement savings plan.
Both managed accounts and TDFs can be offered as a qualified default investment alternative (QDIA) within an employer-sponsored retirement savings plan whereby a participant’s retirement contributions are automatically directed to that investment unless he or she selects a different investment option. Electing to offer a TDF or managed account as a QDIA can significantly reduce costs for participants.
Given the different ways TDFs and managed accounts may reach what can be seen as essentially the same destination – retirement on a participant’s own terms – both investment types may have a place in a plan sponsor’s investment line-up. Just as some people prefer the bus to get where they’re going, others prefer to drive themselves. How participants choose to travel to retirement comes down to their needs and preferences.
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