Managed Account vs. Target-Date Fund: Why You Are Better Off With Voya (GCFES Specific)
The change to Voya still has everyone confused. Well, not exactly everyone, but enough to where I thought I would take some time and explain a few things.
Within the last month (and many times over the previous year), I have had this conversation repeatedly with various firefighters.
Fire Jake: Why doesn't Voya offer a managed account? I need somebody managing my money because I'm not sure what to do.
Me: How is your money invested?
Fire Jake: Well, I don't know.
Me: Are you in a target-date fund?
Fire Jake: Uhh, I think so.
Me: (Goes into a long spiel about why he is now better off)
Well, here goes the (extended) spiel:
When Empower retirement was our record-keeper, they offered a service called managed accounts. You paid them 0.5% of your account balance, and they would "manage" it for you.
They'd put you in a model portfolio based on your risk tolerance (you took a questionnaire at some point) and then rebalanced it every so often.
"A model portfolio is a diversified system of mutual funds that are grouped together to provide an expected return with a corresponding amount of risk."
Steven Juetten, CFP®
The portfolios they selected were suitable, but you could cancel the "managed" account, skip the 0.5% fee, and tell the software to rebalance it automatically. So, it was a rip-off.
But having a "managed" account gave a bunch of firefighters a warm and fuzzy feeling because they had someone watching out for them.
And then we switched to Voya.
Back in last August or September, Voya sent out a mailer explaining that there would no longer be a managed account option. If you were in the managed account with Empower, they would place you in a target-date fund that corresponded with your year of birth.
So what is a target-date fund?
According to Voya:
"The Target Date Funds are designed for participants who want to make a sound investment decision but who do not want to spend significant time weighing and/or revisiting that choice. It is comprised of a family of funds professionally managed by American Funds. The funds are diversified among a variety of stock and bond investments and are designed so that you can choose the Target Date Fund closest to your expected year of retirement. Depending on the proximity to that target date, each fund will seek to achieve growth, income and conservation of capital objectives to varying degrees."
The important thing to catch there is that American Funds is managing your investments. According to The Balance, American Funds is one of the largest mutual fund companies in the world. So, no need to lose any sleep over not having a managed account.
Why you are better off now
I stated earlier that Empower charged 0.5% (or 50 bps or basis points in the biz). Each underlying investment also had an associated cost. So most folks utilizing their service had a blended expense ratio of about 0.71%.
When you add that to your managed account fee, you were paying 1.21% for Empower to rebalance your investments. A service they provided for free.
So what are you paying now?
You are now paying anywhere from 0.33% to 0.45%, a vast improvement from the 1.21% you were paying. That difference equals hundreds or even thousands of dollars of savings depending upon your account balance.
Things to consider:
1) The target-date allocation may not be right for you at all stages of life.
Target date funds follow what is known as a glide path. It's a fancy way of saying your investments get less risky as you get closer to retirement.
But is a 50/50, 40/60, or 30/70 stocks to bonds portfolio right for you in retirement? Maybe. Maybe not. And that is where the one size fits all solution falls short.
The risk of running out of money before you run out of time may warrant a tilt towards a growth portfolio.
The presence of pension income, social security income, and the amount of savings you've accumulated will affect the best solution for your situation.
2) You can create a lower-cost diversified portfolio doing it on your own.
The target-date funds available in our plan are reasonably low cost. Still, you can achieve a diversified portfolio that may be better suited to your needs with the other funds available.
This is a more hands-on approach. Once you select your investments, you can set them to rebalance quarterly, semi-annually, or yearly. Ensuring your investments get rebalanced regularly is of utmost importance. So take advantage of the automatic rebalancing feature!
3) Investment performance is out of your control
You have no control over the macro-economy or how apple and Facebook stock do this year. So don't waste time worrying about what Trump's next move will do to the economy. Spend time focusing on your circle of influence.
Increasing the amount of money you save into tax-advantaged accounts will have a sizable impact on your retirement nest egg. And this is well within your control. So focus on the things that are going to allow you to spend less, save more, and build wealth through the power of compound interest.
I know target-date funds and ETFs and all the other jargon you hear can be confusing. However, building wealth and achieving financial freedom is your responsibility and educating yourself on the tools to do so is imperative. If you have any questions or need resources to help you educate yourself, please email me.
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