Research Library
The Default Investment Decision: Weighing Cost and Personalization
By David Blanchett | 07 June 2017
Target-date funds (TDFs) are the dominant default in defined contribution (DC) plans today, although interest in more personalized solutions, such as managed accounts (MAs), has been growing. This paper introduces (and explores) a number of factors that should be considered when selecting the plan default investment, especially the ability of the default option to appropriately match a participant’s risk level. The analysis suggests that MAs is likely to result in an outcome that is equal or better than TDFs among each of the factors considered. The relative benefit of MAs as a default (over TDFs) was largely driven by the increased personalization of the solution, which typically comes at a higher cost than TDFs, ranging from (effectively) free to over 50 bps for some providers. The higher cost associated with MAs will obviously have a material impact on the potential value participants will realize from the solution. Therefore, it is critical for plan sponsors and DC consultants to understand which types of participants are more likely to benefit from MAs as a default to make a more objective default decision.
Terms of UsePrivacy PolicyGlobal ContactsSecurity CenterJobs
© 2017 Morningstar. All rights reserved.