It is a new world of investing for clients actively preparing for retirement, and defined contribution plan consultants expect that future markets will as equally volatile as they have behaved in the recent past, and offer lower returns.
That is why they view asset diversification and custom target-date strategies as key elements to successful defined contribution schemes for retirement income planning, according to plan consultants that the Pacific Investment Management Co. surveyed last December and January.
Actually 54% of report that volatility is expected to be higher compared with markets since 1926. With such an investing environment, “where are they going to get investments to be able to help their clients meet their needs?”
Financial planners and other independent advisors working with consultants can expect to see a lot of interest in strategies than preserving clients’ assets.
PIMCO surveyed 29 DC consulting firms that serve almost 2,500 clients whose DC assets total more than $1.5 trillion. A whopping majority of consultants, 86%, suggest using Treasury Inflation-Protected Securities as a way to reduce risk in asset allocation strategies.
Consultants also said that active management makes the most sense for all asset classes, except large-cap U.S. equities. “Most would agree that the information flow in the large-cap equity market is the greatest and the best honed,” Stacy Schaus, PIMCO’s senior vice president and head of its defined contribution practice said. “You can say the large-cap market has the most efficiency.”
Investment areas where active management had the most value were markets that were less liquid, transparent or that had a lot of other issues that presented opportunities to generate alpha returns, Schaus added. Specifically, emerging-market equity, non-U.S. bonds and small-cap U.S. equities were the two top asset classes where active management did the most good.
Much of the survey dealt with best practices for designing and managing target-date strategies. As Schaus mentioned, half of all companies in the U.S., particularly ones with defined contribution plans, enroll participants in target-date plans. The question becomes which ones are the most appropriate.
“Most of the major firms have a fund, but on what basis do you compare and contrast, and what is the most important feature in those plans?” Schaus said. “Many consultants in the survey said it’s the glide path allocation within them—rather than fees, performance or passive or active underlying options—which we agree with completely.” The glide path focuses on how much overall risk is within the asset allocation, in relation to meeting the retirement income goal.
When it comes to custom strategy services, 82% of survey respondents provide underlying manager selection, 75% offer glide path creation, and 79% do glide path implementation. Half of the surveyed consultants actively promote custom target-date strategies, one quarter of respondents are neutral in support, and only 11% react passively to custom.