There are more ways for defined contribution plan participants to gain access to professional investment management than by defaulting them into target-date funds or using a separately managed account. Chris Costello and his fellow partners want blooom, a relatively new algorithm-based DC plan asset management service, want to be one of them.

Since its founding in 2013, Overland, Kansas-based blooom has collected 745 plan participant clients whose DC plan assets collectively total nearly $90 million. The average account size is $120,000, and the average participant age is 39.

‘Do it for you’

“This is a ‘do-it-for-you’ solution,” says Costello, blooom’s CEO. The service costs participants with at least $20,000 in assets $15 per month, and $1 month for participants with less.

For that price, the participants’ assets are managed in a fashion somewhat similar to a target-date fund, but using the investment options available within the participant’s 401(k) plan. Blooom’s system is based on 16 different asset classes. The asset allocation is adjusted as the projected retirement date nears. However, blooom’s glidepath differs from those of the largest TDF providers.

Plan sponsors play no role; participants merely delegate legal authority to blooom to direct their investment selections using available options within the plan. Blooom, using an intermediary service, taps into participants’ accounts online to make periodic portfolio adjustments. (Assets remain with the plan’s custodian.)

Blooom’s pitch to plan sponsors? That they can (if they pick up the tab) offer employees a “unique” benefit, increase participation, minimize plan costs, and “minimize participant [investment] mistakes,” among other claimed benefits. In theory, sponsors might gain some of those benefits simply by letting participants know the service exists.

Blooom’s asset management system operates using two variables provided by participants: the number of years before their planned retirement, and the level of volatility they are willing to tolerate. They can default into an average risk profile if they choose, and more than 90% do so.

A third driver of the system’s investment selection process is using investment options within the same asset class that have the lowest management fees – assuming there is more than one choice, of course.

‘Incorrect’ retirement investing

The vast majority – 83% – of participant accounts are invested “incorrectly” when blooom first analyzes participants’ accounts, according to the company. (DC plan participants can have blooom analyze their current asset allocations without charge, and 20% of those who do so wind up subscribing to the blooom service, Costello says.)

Why would participants be better off using blooom than the (presumably) available target-date fund option?

“We know from the data that people aren’t using TDFs correctly,” says Costello. “They will put some money in a TDF, and then more in, for example, an emerging market stock fund.” That pattern suggests participants do not understand that a TDF is built on the foundation of optimum asset allocation which presumably would include exposure to emerging market equities.

Also see: Despite go-to status, TDFs remain an investment mystery to many employees

Another advantage Costello asserts blooom has to offer is what he considers a more appropriate glidepath for relatively younger participants. “A lot of the TDFs have way too much in bonds and cash” when participants’ anticipated retirement is many years into the future, he says.

For example, in blooom’s model, participants 20 years out from retirement would have a 100% equity exposure. In contrast, Vanguard’s 2035 fund currently has an 82/18 stock/bond mix. Fidelity’s 2035 Freedom Fund’s mix is 94/5 and 1% in cash. Similarly, blooom’s 10-years-to-retirement mix is 80/20, while Vanguard’s is 68/22 and Fidelity’s is 63/24/3.

Richard Stolz is a freelance writer based in Rockville, Maryland.

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