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Executive summary

  1. Some target-date managers are allocating to an account held at the recordkeeper, typically referred to as a general account, to deliver shared economics that may help reduce plan recordkeeping costs. This raises the question on the part of the manager of the target-date series about how best to integrate this allocation.
  2. In our view, replacing cash with a general account is impractical and would increase credit risk. We believe utilizing fixed income lowers expected return and could increase the overall portfolio’s correlation to equities during market selloffs.
  3. On the other hand, we believe sourcing a general account allocation from equities comes without these drawbacks, and with the ability to replicate the original series’ risk profile and asset-class exposures with equity derivatives.

General Account: proprietary account of an insurance company affiliated with the recordkeeper in which it manages its own funds; typically invested in fixed income and cash.

Target date funds have become a popular option in employer sponsored retirement plans; since professional managers actively make asset allocation changes as time passes, investors enjoy the straightforward approach that target date funds allow. Some managers of these series have been partially allocating funds to the General Account (GA) of a plan’s record keeper. Dubbed ”co-manufactured” target date series, these are currently being offered as the qualified default investment alternative (QDIA) in employer-sponsored retirement plans.

The reason behind this shift is simple – record keepers incur costs that must be charged back to the employer sponsoring the retirement plan. Allocating to the record keeper’s GA results in shared economics that can be passed back to the plan sponsor and help offset these costs.

As co-manufactured are utilized among plan sponsors, managers of target date series are presented with a question – “what is the best way to allocate to a record keeper’s GA without sacrificing liquidity and return potential, or increasing risk?”

In this paper, we critically examine the respective merits of various approaches to including GA as a new allocation within target date series.

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