The Retirement Tier: Developing an Investment Menu Targeted at Retirees

By Randy Myers 

Defined contribution plans have focused for decades on helping American workers save money for retirement. Now they’re scrambling to help workers figure out how to manage and spend down their savings once they do retire. The ABA Retirement Funds, a not-for-profit organization that sponsors a retirement program for law firms and other organizations in the legal community, is pioneering a novel approach to this new challenge. It centers around the creation of a special tier of investment options for participants in or near retirement. 

ABA Retirement Funds Program —the “Program”—provides services to approximately 4,000 retirement plans with about 37,000 participants. It has assets of $7 billion, including $600 million in stable value.  

A small professional staff and 13 volunteer directors oversee the Program, relying on three primary vendors for its operations. Mercer serves as the outsourced chief investment officer (OCIO) with full discretion over which investment options are offered to plan participants. Voya Financial handles recordkeeping and administration, and Charles Schwab & Co. provides a brokerage account for participants who want to invest outside of the investment lineup. 

Mercer’s Will Moreton, a principal in the firm’s wealth practice, serves as a consultant and relationship manager to ABA Retirement Funds. Speaking at the 2024 SVIA Spring Seminar, Moreton explained how his firm has reshaped the Program’s plan investment menus to better serve retirees. 

In late 2020, Moreton said, the Program introduced three “paths,” or tiers, of investment options for plan participants. The first tier is aimed at participants who want the organization to make it as easy as possible for them to save and invest; it offers target-date and target-risk funds. The second tier offers a carefully curated list of investment funds—U.S. stocks, international stocks, bonds, and other asset classes —and allows participants to build their own portfolios using those funds. 

The third tier, entitled “I’m retired or almost there,” is targeted specifically at participants in or near retirement. The primary goal is to make it easy for them to choose investments appropriate for that stage of the retirement journey. The ABA Retirement Funds believes that offering participants the retirement tier may help more participants consider keeping their retirement savings in their plan, which would allow them to continue to receive Mercer’s professional fund management and retain access to stable value. 

The retirement tier offers four investment options: an income focused fund, an inflation protection fund, a diversified growth fund, and a stable value fund it calls a capital preservation fund. Selecting those names for those funds was important, Moreton said, since participants can relate to investment objectives more easily than asset classes. 

The retirement tier has seen meaningful growth since its launch, Moreton said, accounting for about $43.5 million in assets at year-end 2023. The capital preservation fund, in turn, accounted for more than half of those assets. There were 859 participants in the retirement tier at year-end, up 17% from the prior year.  

ABA Retirement Funds Executive Director Scarlett Ungurean, who joined Moreton in speaking at the Spring Seminar, said she is “quite happy” with the growth of the retirement tier, both in terms of the number of participants it’s attracted and the dollars they’ve allocated to it. She also spoke favorably about the role of stable value in the retirement tier, which Moreton characterized as the “cornerstone” of the retiree investment menu. 

While she’s pleased with the retirement tier, Ungurean noted that ABA Retirement Funds is not finished with its efforts to better serve plan participants in or near retirement. For example, the Program’s managed account provider recently began offering professional management users a spend-down feature. 

“In terms of innovation, we’re not done …,” Moreton agreed. He said Mercer is investigating a plan to introduce a second phase of the investment menu that would add guaranteed income or spend-down solutions, either on a standalone basis or as a component of target-date funds. 

“We’ve been looking at adding a distribution feature for over a year now, and we think that will be a good evolution in terms of resources for retirees as they stay in the Program,” he said. 

Responding to a question from the audience, Moreton said he didn’t believe that Mercer had, at this time, other OCIO clients prepared to implement a three-tier investment lineup like the one developed for the Program. But he suggested that while it is early days for implementation of retiree income solutions the idea is worth consideration by other plans, and he said Mercer would continue to look for ways to bring new ideas to its OCIO clients.