Currently, a target-date fund, or TDF, is used as the default for a retirement plan. The current target-date fund is very popular because of a few reasons:
- It is simple to understand.
- It is low cost.
- It is de-risked over one’s lifetime.
From that standpoint, Target Date Fund is a natural thing to do for people who are interested in not doing anything, frankly.
The problem with the current Target Date Fund, or as we like to call it, “Target Date Fund 1.0”, is age is the only differentiator between people. Even your age is not that precise. TDF 1.0 groups all the people within five years of your birthday, into a single investment vehicle, but it is better than not having any plan at all.
What is wrong with that? Well, it is not so much what is wrong, but how can we improve on it?
Currently, the industry is using averaged data. We’ll say, “What is your average income?” We don’t know what that means specifically, from an individual basis, so they use an average. They say, “People are going to retire at age 65.” That’s not necessarily accurate. They use an average contribution rate. You may be contributing more, or you may be contributing nothing, but all TDF 1.0 uses these assumptions that are national averages.
There are two challenges with this:
- Everybody within five years of your birthday is grouped into a single portfolio.
- Within that portfolio, the assumptions are also averaged.
We came along asking, “How can we improve on this?” And the way we improved on the TDF 1.0 is through Big Data. We actually have information about you as a participant in the plan such as your specific age, your actual salary, exactly how big your investment is into the retirement plan ,your contribution rate, and your employer’s contribution rate. This allows us to easily project, based on your current income, what your Social Security income will be.
This is far more personalized to you than all the averages and bundling you into one fund. We call this iGPS, Individualized Glide Path Solution, Target Date Fund 2.0. We think this is a real differentiator because we can accurately personalize it for you, and that just makes sense.