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How to Support Sponsors in TDF Evaluation

Overview

  • As assets continue to flow into target date funds (TDF), plan sponsors need guidance on how to navigate the landscape and choose the right target date fund for their plans.
  • Providing sponsors with insights and expertise can help you strengthen your value and build your business as a TDF specialist.

Target date funds (TDFs) are surging in popularity. But if one thing has become clear, it's that choosing the right one can be challenging.

Sponsors are beginning to recognize the sheer complexity of these funds, and they are looking for expertise on TDF philosophy, glidepath engineering, and asset class selection so they can make the choice that best meets their needs.

In a DC marketplace that now places greater emphasis on transparency, helping sponsors "get it right" gives you a compelling opportunity to grow and evolve your practice and build your value as a TDF specialist.

DC Edge spoke to three leading retirement specialists to find out how advisors can show their value and distinguish themselves when working with TDFs.

If you want to distinguish yourself as a TDF consultant, avoid defining your value strictly in terms of fund picking.

We found four ways to demonstrate your value:

1. Help sponsors understand their needs

Plan sponsors may seek your guidance because they are ready to make a change in their current provider, say the retirement specialists.

Although initially it may seem that the best way to approach this is to do a quantitative review by comparing fees and performance, ultimately, that will not serve clients or participants—and it may actually undermine the relationship, says Kathleen Kelly, managing partner at Compass Financial Partners.

This is why it's important to spend time getting to know the plan, including the underlying needs of clients, as well as participant demographic trends, and behavior. Dig deep into whether plan participants have unique characteristics around retirement age, earnings, access to traditional pensions and more.

The next step is to help the plan sponsors understand their philosophy and the goal for their plan, adds Kelly. Key questions to ask:

What are you trying to achieve with your plan?

What do you want for your participants? To help preserve savings with less risk exposure (especially nearing retirement)? Or, to help them maximize every dollar invested? Or, is it somewhere in the middle?

In addition, if the client does not have an Investment Policy Statement that captures their philosophy, consider helping them develop one. It will not only clarify the search parameters for a new provider, it can also help set expectations for performance and retirement replacement ratios that may reduce problems later on.

2. Analyze and compare funds to narrow the field

Once sponsors understand the plans' needs, they are ready to go to the next step: Analyzing the TDF objectives and glidepaths to meet those needs, according to the specialists.

Gathering all the necessary data for a robust analysis can be quite challenging and time consuming, and may not always be accessible to sponsors. That's why it's important for advisors to come to the table with an evaluation process to help cut through the industry jargon and educate sponsors on TDF strategies, says Kelly. BlackRock's resources can help educate sponsors on the various target date types, asset classes, and strategies.

Think of the evaluation process as the roadmap for your TDF business. It can help you and your clients identify the objective, glidepath construction, asset allocation, as well as the implementation strategies that meet the needs of the plan, including whether the plan is best served by an indexed, actively managed, or hybrid approach, she adds.

"A critical part of the evaluation process is being able to provide some level of cutting-edge analysis to help sponsors make good decisions when choosing among many similar TDFs," says John Pickett, senior vice president and financial advisor at CapTrust. "We employ quantitative and qualitative analytics on the fund and the construction of the glidepath. We analyze the management approach, whether they're using internal proprietary sub-funds or externally managed sub-funds," he says.

We believe that by following this process, sponsors should be able to zero in on a "short list" of funds worth analyzing in depth before making a decision. When it comes to making the final recommendation, help sponsors pick the fund that fits their needs—not the fund that has impressive, but unnecessary, bells and whistles.

3. Think process over performance

When evaluating TDFs, some advisors caution against putting performance over process.

Rather, focus on how a sophisticated investor would evaluate a product, says Henry Yoshida, Principal, the Maresh Yoshida 401k Group. "Take, for example, a hypothetical hedge fund that's launching with zero assets and no history at all. The only thing a potential investor can look at is the hedge fund manager's intent, structure, overall strategy and underlying investment process. Plan sponsors need to look at the same things when considering any future investment," he says.

4. Look at the whole plan, not just the investment options

If you want to distinguish yourself as a TDF consultant, avoid defining your value strictly in terms of fund picking. At the end of the day, ask yourself whether or not you are a consultant who just wants the business—or if you were hired to address challenges, advises Yoshida.

A true consultant will be looked upon to manage investment and plan design, he explains. "Unless you take full responsibility, you are likely to, at best, let existing plan sponsors' mistakes continue, and at worst, create additional new problems."

As a leader in the target date space, BlackRock offers a range of practice management resources you can use to help educate plan sponsors about the changing nature of the TDF landscape so that they can help make the most appropriate selection for their plans and can help make measurable differences for their participants.

To learn more, visit www.blackrock.com/tdfedge

5 Key Questions in TDF Manager Selection

William Middleton, CFA, Financial Advisor, Raymond James, says these five questions are critical to ask during TDF manager selection:

  1. What is the depth of intellectual capital, including research and analysis process?
  2. What is the level of expertise in building asset allocation models?
  3. What is the track record of the TDF manager in selecting the appropriate asset classes?
  4. What level of portfolio risk is being taken and how does this transition as the client approaches retirement?
  5. What are the actual fees being charged in exchange for the value delivered

The information contained in this material is derived from third-party sources deemed reliable, but BlackRock does not guarantee the completeness or accuracy of the information. The material is provided as an educational tool and should not be considered investment advice. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. BlackRock is not engaged in rendering any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice.

The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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Prepared by BlackRock Investments, LLC, member FINRA

DC-0604 / 11-13