Mutual fund shops take heed. PIMCO's 2013 Defined Contribution Consulting Support and Trends Survey sheds light on how consultants are helping their plan sponsor clients design their plans around target-date and retirement income products.
Money Management Executive spoke with Stacy Schaus, executive vice president and PIMCO's defined contribution practice leader, about how consultants are picking target-date funds and why insurance products still can't gain traction in 401(k) plans.
So what are some of the highlights of the recent survey?
The vast majority of consultants suggested that sponsors have a default tier for target-date or target-risk funds. We also asked them which strategies should be actively managed and at the top of that list is global asset allocation strategies, which target-date funds are for the most part. Generally, the more global in nature, the more important consultants felt active management was needed.
If we look at the other categories where they felt it was important for active management, non-U.S. bonds, emerging market equities, U.S. bonds and commodities are also at the top. This reflects certain inefficiencies and the fact that you can't fully replicate certain markets and the value that can be brought by overseeing securities in certain parts of the world.
Were there strategies that consultants didn't feel as strongly about needing active management?
The weakest score went to U.S. large-cap equities. There 15 out of 50 felt it was not important to actively manage. Still, the majority there felt it was very important to actively manage these investments. But this is a reflection of you can buy fully replicated indices there. You may argue that this market is most efficient because of the amount of information flow available.
The survey revealed how consultants are currently selecting target-date funds, which is a big deal to asset management firms. Can you talk about that a bit?
I found how target-date funds (TDFs) are being selected very interesting. We asked consultants based on what criteria would they select TDFs and performance was way down the list. They were much more concerned about the glide path structure, which conveys the amount of risk taken at different points of the fund's life. Consultants were also looking at the underlying investment management in terms of what strategies were available as well as risk management and fees. So they're more focused on risk management than absolute performance.
Has this always been true with past surveys?
I think it's increasing. If we take the results from last year, any more of the items that they deem important are in the risk management categories so I think it's gaining in terms of importance.
On the plan sponsor side, it seems like the bigger they are the more likely they'll look for customized products.
This was a question we asked for the first time and that was to what extent might a sponsor pick a target-date strategy that is offered by someone other than their record-keeper and consultants felt pretty strongly that the larger the plan ($1 billion in assets and up), the more likely they would move away from proprietary products. At this size, they have the oversight and can go to their recordkeeper and say that they want customized products over proprietary ones.
But even with plans of $200 million in assets and up, you had consultants believing that they would start moving away from their record-keepers' TDFs.
What are consultants looking for in retirement income products?
The most interesting thing about retirement income is that consultants rated at-retirement target date at the very top. When you think about where the money is flowing within DC plans for people who are older, you can see the money is building in balanced-type strategies, including target date funds.
So, perhaps it's not surprising that consultants believe getting the at-retirement target-date strategies is most important, even for retirees.
Second to that, they focused on having conservative fixed income options and also diversified fixed income so that might be high-yield, emerging-market credit where retirees who decide to stay in the plan have more options and opportunities for added income or yield. And then after those options, they put in having a systematic withdrawal, which might be a managed account-type program but could also be installment payments, as important.
But they're going down five options before getting to a single type of insurance product. The type of insurance product mentioned first among investors is deferred annuities. So consultants are saying make sure you have your core and default lineup, including your capital preservation strategies, right first.
Why are consultants and sponsors wary about insurance products?
The number question for insurance products was portability. So as a sponsor, how do you move the product out if you no longer wanted it? What this study is showing us is there's probably a lot we can still do that doesn't involve introducing insurance within the plan. This means focusing on getting the target date right in terms of risk management.
How do sponsors feel about having retirees in their plans?
Plan sponsors have more interest in retiree assets because the larger the plan, the more benefits to them because more assets mean lowers costs for plan sponsors and participants.
What consultants observe is that their plan sponsor clients are interested in having those assets there but not necessarily doing anything about it. So there's no active movement on the part of sponsors to make retiring individuals aware that they can stay.
But very few sponsors want retiring participants out of their plans. In fact, only four consultants said their clients preferred that participants get out of their plans.
