In the Loop

Exploring personalized investment solutions and “beyond basic” diversification

February 08 2024

2024 U.S. Retirement Market Outlook 

Exploring personalized investment solutions and “beyond basic” diversification   

Gillian  Kemmerer, Asset TV

Welcome, I'm Gillian Kemmerer. And today we are joined by Jessica Sclafani, senior defined contribution strategist in the Americas division at T. Rowe Price. Jessica, it's a pleasure to have you here in the studio today. 

Your colleague Rachel just discussed how T. Rowe Price uses personalization to help investors make good savings decisions. So how do you see personalization being deployed in investment solutions? 

Jessica Sclafani

Sure, well, personalization is undoubtedly a growing theme within the defined contribution market. Today,  there's general agreement that the more we know about an individual participant, the better job we can do in building an asset allocation that specifically meets their risk and return objectives. Now, that said, personalized investment solutions, like managed accounts, typically come with a higher price tag than other multi-asset investment solutions. And it's really this price differential and a general concern among plan sponsors that participants won’t engage with the personalized investment service that has prevented widespread adoption.

And it's really based on this feedback from the plan sponsor and consultant community that spurred our multi-asset research team to explore how we could incorporate personalization into our target date solutions. So beginning in 2024, we'll be able to support plan sponsors who have high conviction in their target date solution as the plan’s default but are also looking to incorporate personalization into the plan. Most importantly, we'll be able to do this leveraging the same target date investment engine, the same underlying investment building blocks, and at a comparable price point to our target date solutions. This is important because it means that it doesn't need to be personalization or target date solutions going forward, we can have both. 

Gillian Kemmerer

After years of industry discussions on retirement income, T. Rowe Price believes that the tide may be turning as workplace retirement plans shift from an exploratory to a more decision-oriented posture on in-plan retirement income solutions. Can you tell me what's driving this trend?

Jessica Sclafani

Sure. Well, that's exactly right, Gillian, and our research supports that observation. We learned,  based on a Q4 2022 survey of about 160 DC plan sponsors, two-thirds or 66% of plans say they prefer retired participants stay in the plan. This is really a striking data point when considered in the historical context of DC plans. Even as recent as a decade ago, the majority of employers wanted retired participants to take their assets and leave the plan. So coming back to your question, really what's driving this reversal? Today, the 401(k) market as a whole is in negative net flows, and now many plan sponsors are starting to see this dynamic take place within their own plans. To maintain current pricing, whether it's administrative or investment management fees, more employers are now encouraging retirees to stay in the plan. There's also a cohort of employers who philosophically believe that retired participants will be better served by staying in the plan and maintaining access to institutionally priced investment vehicles, as well as benefiting from ongoing fiduciary oversight.

Now that more plans are looking to retain retirees. We really are seeing them evolve from more of a purely educational or exploratory review of in-plan retirement income solutions to really thinking more along the lines of implementation. So, considering specific retirement income products or features that would support their unique retiree population. 

Today, we see most plans are focused, first and foremost, on recreating that paycheck-like experience for retired participants. This is most recently been reflected by the growing number of plans that are now offering our managed payout capability. Over time, we anticipate that there will be a place for guaranteed retirement income solutions in plans. But today, we really see most plan sponsors are focused on supporting participants in taking that lump-sum account balance and then converting it into a predictable and regular stream of income in retirement. 

Gillian Kemmerer

Many market participants believe that we are in a higher-for-longer environment. How does T. Rowe Price position its targeted portfolios to weather the uncertain economic future? 

Jessica Sclafani

Sure, I think it's fair to say that looking to the future, we're likely to experience persistent inflation concerns, as well as continued interest rate volatility. Both of these present significant risks to retirement investors. Now we know   as participants age, a growing portion of their target date solution is allocated to fixed income, leaving them particularly exposed to interest rate risk. 

So we're encouraging plan sponsors and their consultants and advisors to really take another look under the hood at the fixed income portion of the plan’s target date solution. For example, if the plan offers passive fixed income investments, we think it's worth posing the question, “How has that worked for the plan and its participants and are you still comfortable being passive in fixed income?” Furthermore, if the fixed income portion of your target date solution is limited to U.S. investment-grade bonds, how will that serve retirement savers, particularly as we think about a higher-for-longer interest rate regime in the future? 

We believe that our diversified approach to structuring participants’ fixed income exposure leaves us better position to weather multiple market environments. We certainly wouldn't want to ask participants to make allocation decisions across high yield, emerging markets debt, or TIPS. But the beauty of a target date solution is that we can leave that to the experts who will do it for participants.  

Gillian Kemmerer

Well, thank you so much for taking the time to share what you're seeing in terms of personalization, what you're hearing from plan sponsors, and also how a target date solution could help weather an uncertain economic future. 

Jessica Sclafani

Thanks, Gillian. 

Gillian Kemmerer

And thank you for tuning in. You just heard from Jessica Sclafani, senior defined contribution strategist in the Americas division at T. Rowe Price. 

Are plan investment menus meeting individual participants’ risk and return objectives? Senior DC Strategist Jessica Sclafani, CAIA, discusses personalization challenges, where plan sponsors are on the road to retirement income solution decision-making, and the opportunity for plan sponsors to look more closely at the fixed income portion of their retirement plan’s target date solution.

Important Information

This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.​

The principal value of target date funds is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire. These funds typically invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. In addition, the objectives of target date funds typically change over time to become more conservative.​

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation, or a solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.​

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.​

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