The Story Line in Retirement Plans

Tim McCabeDespite signs to the contrary—like the Pension Protection Act and target date funds—planning for retirement is not a one-size-fits-all activity. Although there are overall best practices in plan design, each participant’s investment needs may vary. This recognition has led to an increased interest in managed accounts, which allow for a tailored asset allocation for each individual participant. Tim McCabe, national sales manager, Stadion Money Management, spoke with PLANSPONSOR about the changes to asset-allocation vehicles in the last 10 years and how that drove the company to offer a new managed account product, StoryLine, built with SPDR® ETFs.

PS: We know that asset-allocated investment solutions are key to creating properly diversified accounts. But that approach tries to turn people into investors. I think it’s very clear that the right approach for long-term participant gratification and accomplishment is some sort of asset-allocation solution that includes proper diversification. That role traditionally has been held by target-date funds [TDFs] since the passage of the Pension Protection Act [PPA]. Can you tell me why, and how we’ve gotten to where we are now?

Tim McCabe: There are two questions there. Let’s start with why TDFs have dominated: probably the biggest drivers of TDF inflows in recent years have been the PPA’s QDIA mandates and the fact that target date funds have an easy-to-understand premise. However, despite being a good first step—and certainly better than what the marketplace offered before their creation—the emerging realization is that simple ‘age-massing’ fails to recognize the individuality of participants. We say this knowing that we’ve built TDF CITs into Stadion’s retirement plan offerings. But it’s a new day and time to recognize that no two 35-year-olds are identical. Yet target-date funds imply they are. Despite similarity of age, each participant is unique. One size simply doesn’t fit all. StoryLine is Stadion’s latest iteration of ‘customized’ managed account solutions. It brings tailored allocations both at the company level using enterprise demographics, and at the individual participant level based on what it learns from each participant about personal risk tolerance, financial wherewithal and needs.

The first goal is to help participants into the correct allocation profile for their individual circumstances. According to studies from Fidelity and Aon, more than half of participants use other investments alongside their current TDFs. It may be another target-date fund, or maybe last year’s hot fund. Either way, this can defeat the purpose of asset allocation by unbalancing the portfolio in terms of risk. The beauty of a managed account is that the provider is managing 100% of the participant’s assets while acting in a fiduciary capacity. There’s less opportunity for the participant to undo the asset allocation that the professional has put together.

PS: You mentioned technology changing. Tell me about the availability of technology and how managed accounts are using it to improve their outcomes or their customization capabilities.

McCabe: I think “technology in hand” is probably a better way to put it. Just about everybody reading this has a laptop, tablet or smartphone within reach. With StoryLine, participants can access customized account allocations using commonly

available technology to enter information about themselves. This wouldn’t have been possible 10 years ago. Even better, familiarity with technology is no longer limited to Millennials. My 83-year-old mother-in-law walks around with her iPad, too.

PS: One of the criticisms of managed accounts was that you didn’t have enough information to create a truly customized portfolio. Do you believe technology is the key to overcoming that hurdle?

McCabe: Yes. And simplification of use is critical. The latest developments mean that participants can get a risk profile in a couple of minutes by just tapping in necessary responses to their phones. StoryLine is built to help them bring clarity and definition to their progress. The goal is to create a link between what they save and what they want. Rather than continuing to cater to participants not taking action, we are confronting the reality that arriving at the retirement they desire requires their involvement. The emphasis goes beyond custom asset allocation to defining goals and doing the ‘retirement math’.

The twin hallmarks of StoryLine are its dual emphasis on savings and customized asset allocations. We believe this will increase comfort and confidence making it more likely that participants matched with the right risk profile will stay the course during tough markets. On average, bear markets happen at roughly five year intervals. And when they occur, investors exposed to more risk than is comfortable may take the wrong action at the wrong time. Post-2008 many participants with large account losses fled equities. Compounding the error, many stayed out of the market too long, missing the run-up in subsequent years. Had their asset allocations better matched their risk propensity their choices might have been different.

StoryLine’s focus on saving appropriately according to future needs is just as critical. The Social Security Administration [SSA] says that, for people to get where they need to be, they need to save 13% to 15% of their income but on average today save only 6% to 7%. StoryLine is not about averages, it’s about personalization. Participants using accessible StoryLine technology can read the ‘dashboard’ to immediately see the potential results of making a change to their retirement date or their savings rate.

By mathematically calculating where they stand on the road to retirement and what it will take to achieve their desired outcome, StoryLine evidences that the best time to plan for retirement is now, when small changes can create the most impact at the point of retirement.

PS: How does pricing affect 401(k) plans, especially continued innovation like this?

McCabe: Expenses have continued to drop, and will likely drop further. This is good for participants and sponsors. But the first concern of the industry and regulators must be helping sponsors and employees achieve retirement by design not happenstance. Stadion intends to help accomplish this cost-effectively with technology-based solutions that increase the probability of better results based on participant understanding.

PS: What’s changed in the last 10 years? Are there any challenges yet to be resolved with managed accounts that are impeding outcomes?

McCabe: The biggest change for Stadion may be the “Eureka!” moment when we knew that actively engaging participants in a meaningful way would improve the probability they would achieve retirement success on their own terms. A more active participant role is not only advisable but unavoidable if our intent is to maximize the probabilities in their favor. Retirement planning that accounts for individual risk propensity, personal retirement objectives and individual financial circumstances is imperative. The toughest part at first will be overcoming the inertia highlighted by the low participant expectations implied by the PPA and target dates. But ease-of-use, and widespread availability should go a long way.

DISCLOSURES 

Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose value. Stadion is not related to or affiliated with State Street Global Advisors (SSGA) nor are they a distributor of SPDR ETFs.

Standard & Poor’s®, S&P® and SPDR® are registered trademarks of Standard & Poor’s Financial Services LLC(S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.

The SPDR® S&P 500® ETF, SPDR® S&P MIDCAP 400® ETF, SPDR® Dow Jones® Industrial Average ETF are exchange traded funds with the investment objective to correspond to the price and yield performance of the S&P 500® Index, S&P® MidCap 400® IndexTM, and Dow Jones Industrial AverageSM. The shares of the SPDR® S&P 500® ETF, SPDR® S&P MIDCAP 400® ETF, SPDR® Dow Jones® Industrial Average ETF represent individual ownership interest in the Trust’s portfolio.

StoryLine is a marketing term associated with investment advisory services and products provided by Stadion Money Management, LLC. Certain of the StoryLine accounts and funds utilize exchange-traded funds, that bear the SPDR® trademark to implement Stadion’s investment strategy. Stadion receives both an annual payment and reimbursement for certain marketing and other assistance in connection with the StoryLine Accounts from State Street Global Advisors and its affiliates in connection with Stadion’s use of SPDR® ETFs in the StoryLine Accounts. StoryLine is not managed, sponsored or endorsed by State Street Global Advisors or its affiliates and is not guaranteed by Stadion or its affiliates or by State Street Global Advisors or its affiliates. No party makes any representation or warranty, express or implied, regarding the advisability of investing in the StoryLine Accounts, including “StoryLine. Built with SPDR® ETFs.” State Street Global Advisors has no obligations to take into consideration the StoryLine Accounts or investors in the StoryLine Account when managing or creating SPDR® ETFs.” Standard & Poor’s®, S&P®, S&P 500®, Standard & Poor’s 500, 500, Standard & Poor’s Depositary Receipts, and SPDRs® are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by State Street Global Markets, LLC.

Stadion and the Stadion S are registered service marks of Stadion Money Management, LLC. StoryLine is a service mark of Stadion Money Management, LLC. © Stadion Money Management, LLC 2016. All rights reserved. SMM-062016-340

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