Personalization Push Persists

Almost two decades after the Pension Protection Act of 2006 paved the way for target-date funds to become near-ubiquitous in today’s 401(k) plans, a growing number of plan sponsors are now thinking about how plans can evolve further to improve participants’ financial well-being both up to and through retirement.

Many plan sponsors believe the answer lies in more personalized offerings, including options on where and how to direct participant and plan sponsor contributions. The paths plan sponsors are taking toward personalization vary, with employers looking to an expansion of managed accounts and lifetime income offerings, including hybrid qualified default investment alternatives; targeted communications and nudges; and new in-plan (thanks to the SECURE 2.0 Act of 2022) and out-of-plan features.

“There’s a consensus in the industry that the more we know about an individual, the more effective we can be in building an asset allocation that reflects their objectives and meets their needs,” says Jessica Sclafani, a senior defined contribution strategist at T. Rowe Price.

The push toward personalization reflects two key shifts: First, a widespread recognition that improved retirement outcomes require more information than the single data point (projected retirement date) used to inform target-date funds. Second, advancements in technology make it easier to collect and use data about individual participants to produce a more customized retirement road map.

But while recordkeepers and employers may be able to share some data—such as an employee’s salary, age and account balance—they still need employees to share additional information—including outside assets, financial goals and risk tolerance—to fully tailor a retirement offering.

“One of the challenges with personalization has been that if you’re going to use personalization as a default, either you need to get information directly from an employer or recordkeeper, or you need an engaged participant,” says Kevin Walsh, an attorney at Groom Law Group. “One of the things the defaults are trying to solve for is a lack of participant engagement.”

Better Outcomes

A recent study by Prudential made the case for both personalized investments and a managed withdrawal strategy, arguing that even a well-invested portfolio cannot overcome a suboptimal withdrawal strategy. A separate study, published in March in The Journal of Portfolio Management, pegged the average benefit of personalization across assumed balances and salaries at 5% to 6%.

Such research is increasing plan sponsor and consultant interest in both managed accounts and hybrid QDIAs, which incorporate personalization and target-date funds or automatically move participants into managed accounts when they reach a certain trigger point, often based on their age or account balance.

In addition to cost, a deciding factor for many plan sponsors as to whether to introduce managed accounts—on their own or as a QDIA—is the relative heterogeneity of their employment population.

“If your participants are all similar and bunched together closely in terms of their compensation or career trajectory, you might conclude that a target-date fund is more suitable,” Walsh says. “But if your participants are very different than one another in terms of whether they’re highly compensated or the length of their career, you might think a managed account is a better solution.”

Older workers tend to have more assets and more complicated financial situations that may require personal guidance, but younger workers also have important financial goals, including paying down debt, building an emergency fund or saving for a down payment on a home. For now, most managed accounts are offered as an opt-in on the investment menu, according to T. Rowe Price research.

Personalized Communication

Regardless of whether their plan includes a managed account or a hybrid QDIA option, many plan sponsors are finding additional methods of personalizing their offerings and the ways they interact with participants. Often that starts with a targeted communications strategy that corresponds with the specific needs or life stage of an employee, via that participant’s preferred media.

“We’re reaching out to employees to give them education and meet them wherever they are in their retirement journey, to really lay out the benefits of the retirement plan and encourage them to take the next best action,” says Hutch Schafer, vice president of product development for Nationwide Financial.

That best action might simply be enrollment for some eligible employees. It could also be, for those already enrolled, putting a plan in place to boost contributions, or encouraging them to enter additional information about their financial situation so that the next action is more accurate for their specific situation.

“If you’re not hitting on their hot button issues about what’s really important to them, the chances of them fully engaging isn’t as great,” Schafer says. “So providing personalized messaging along the way can get them more engaged and help them make better decisions about their retirement.”

Help From Technology

Recordkeepers are increasingly turning to technology, often with the help of their fintech partners, to make those messages even more relevant to their intended audiences, says Deb Boyden, head of U.S. defined contribution at Schroders.

“They’re providing technology that really speaks in different ways to different populations,” Boyden says. “There’s so much that can be done with [artificial intelligence] now, and a lot of these firms are really taking advantage of AI to customize the messaging even more so.”

For participants who remain in a plan after they have retired, personalization should focus on turning their accumulated assets into income, Boyden says.

“The industry has put a great emphasis on asset accumulation, but decumulation strategies are equally important and arguably more complex,” Boyden says. “All kinds of new variables come into play at retirement: taxes, health care needs when to take Social Security.”

Looking ahead, industry experts say it is clear the trend toward personalization will continue.

“Millions of American workers now have this pot of money [in their 401(k) plan],” says Tim Rouse, the executive director of the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute. “But everyone has different needs and different financial hurdles to overcome, so that’s only going to drive personalization.”