By Alan Gross
Retirement plans typically use the single data point of “date of hire” to start someone on their savings path. Auto enrollment features are triggered on this date and allocate employee contributions to the plan’s QDIA, often a target date fund. Traditional target date funds assign an investment strategy based on the single data point of “age.” Everyone who shares the same age is assigned to the same fund by default. It doesn’t take a sophisticated analysis to observe that a group of people who share the same age may have vastly different incomes, accumulated savings, and needs for future retirement income. As a result, it makes little sense to recommend or apply a portfolio mix based on age alone, when so many other factors matter.
It makes little sense to recommend or apply a portfolio mix based on age alone, when so many other factors matter.
You might argue that it’s reasonable to base a strategy on the single data point of age if you literally have no other information available since younger people obviously have more years ahead to invest and tend to need to grow, rather than protect, their savings. It’s not possible, however, to align or optimize a strategy that fits individuals this way. No investment professional would ever greet a new client coming in the door and, based on their age alone, recommend anything.
If the objective is to help people save enough to secure adequate retirement income, how many data points do you need to calculate this goal? The answer may be variable, but consider including these key data elements in the equation:
To understand normal retirement age and future years to model investment growth and compounding
The basis to suggest and calculate a meaningful savings rate
A balance to consider toward the goal along with future years of growth
To optimize the value of an employer’s contribution
Adding investment balances to overall progress towards the goal
A core component of modeling true retirement income
Where you want to live in retirement
To reflect how differences in local and state tax rates impact retirement income needs
To consider how anticipated healthcare expenditures impact retirement income needs
Obviously, this is simply an illustration as other factors may be important as well, but it reflects the opportunity of evolving and personalizing the retirement plan experience. The essential key, of course, is access to this data via tight integrations between recordkeeping and retirement planning and advice platforms. It’s the only way to provide this quality of experience at scale. It’s also the foundation of more robust QDIA offerings, including managed account programs that work to help people understand their retirement income goal and to reach it – no matter their age.