A new series from
AllianceBernstein, co-managed by Morningstar Associates, invests in funds
managed by several experienced investment managers, including AQR, Franklin
Templeton, MFS and T. Rowe Price. AllianceBernstein designs and manages the
series’ moderate-risk glide path, adjusting asset-class exposures as market
conditions change, and provides overall program oversight. The fund seeks to reduce risk and generate
uncorrelated returns. Morningstar selects funds from the broad offerings of
each participating firm.
Encouraging early feedback from consultants and financial advisers shows the marketplace is
interested in a target-date fund (TDF) that incorporates some of the
suggestions from the Department of Labor (DOL) on target-date fund selection, says Craig
Lombardi, managing director of AllianceBernstein’s defined contribution
investment only (DCIO) sales. The DOL recommended that plan sponsors determine
whether nonproprietary or custom target-date funds would be a better fit for their plans,
Lombardi notes.
AllianceBernstein is a global
investment management firm that offers research and diversified investment
services to institutional investors.
Morningstar Associates is a
registered investment adviser and wholly owned subsidiary of Morningstar Inc.
It is part of the Morningstar Investment Management group.
Speaking at the 2015 PLANSPONSOR National Conference in
Chicago, two longtime industry executives dissected the top trends impacting
retirement plan administration and employee benefits generally.
From the oft-cited decline of the corporate pension system
to the boom in financial wellness programs in the defined contribution (DC)
context, plan sponsors and their service providers are in the midst of great change,
noted Sean McLaughlin, senior vice president for client relations and
business development at Prudential Retirement. Greg Wilson, managing
director and head of platform solution group for North America at
Goldman Sachs Asset Management, echoed that sentiment and suggested plan sponsors
today must confront a remarkably dynamic set of opportunities and challenges.
Presented below, in no particular order, are the top 10
trends Wilson and McLaughlin confront in their daily work with retirement plans
and the sponsors whom run them.
1. The decline
of pensions and the rise of DC plans
Still a trend impacting the retirement space today,
McLaughlin suggested the decline of pensions has been playing out for decades.
He pointed to the year 1975 as an important milestone—the year following the
passage of the Employee Retirement Income Security Act (ERISA).
“At that point there were approximately 33 million
participants in private defined benefit (DB) pension plans,” he noted. “It’s a
statistic that surprises a lot of people, but the number of DB participants actually
didn’t plateau until 1980, when it reached about 41 million, which is about
where we still are today, though a decline has started in earnest.”
Granted, the overall U.S. population has grown substantially since 1975, so while the rote number of participants has
remained level, the covered portion of the U.S. population has dropped off
steadily with that population growth. Private employers have moved away from DB
plans for a variety of reasons, not least of which is substantially increased
longevity amongst participants.
On the DC side, there were about 10 million people contributing
to such accounts in 1975, McLaughlin said. Today, it’s grown to more than 90
million.
“So from this perspective DC plans are already way past where
pension plans were at their peak, in terms of participation, and they’re still
growing,” he said. “We all know what’s behind this. It’s the risks inherent in
retirement income guarantees and defined benefits. In DC the same risks are
present, but they’re borne by participants rather than plan sponsors. There’s
very little chance this trend will reverse course.”
2. Money market fund reform
Wilson pointed to
money market reform as another important ongoing trend for plan sponsors and
service providers to be aware of.
“In many ways, new regulations mean cash has become
complicated,” Wilson suggested.
The regulations he’s referring to are the Securities and
Exchange Commission’s (SEC) money market fund reforms, which take effect in October 2016.
Many investment experts have opined the changes will require
retirement plan sponsors to review the money market funds in their lineups
and possibly replace their funds. The changes will affect nearly two-thirds of
plans, as 63.5% have money market funds in their lineup, according to the 2014
PLANSPONSOR Defined Contribution Survey.
Wilson noted the rule amendments require investment managers
to establish a floating net asset value (NAV) for institutional prime money
market funds. The rule also allows non-government money market funds to use
liquidity fees and redemption gates.
“What’s the practical implication of this? Plan sponsors
will likely have to switch to government money market funds, due to the growth
of things like liquidity fees and redemption gates in the prime money market
funds,” Wilson said. “Today you see many plan sponsors using prime money
market funds, but it’s going to change under the new rules.”
3. Reducing Risk
in DB Pensions
“What do General Motors, Verizon and Bristol-Myers Squibb have
in common?” McLaughlin asked. “They have all completed substantial pension buyout
transactions in the last handful of years.”
McLaughlin pointed to recent polling data showing 45% of human
resources and finance executives said their companies have the intention to
transfer or have transferred pension debt to an insurer.
“Why so much interest in pension risk transfers? The main reason
is that companies sponsoring pensions simply aren’t in the business of managing
liabilities and assets,” McLaughlin explained. “The core business is something
else—whether that's manufacturing or technology or whatever. And asset managers are way better at managing pension assets and liabilities, frankly. The second issue
is persistently
low interest rates during a time of strong markets, which helps makes risk transfers attractive.”
Beyond these factors, new mortality tables from the Society
of Actuaries are anticipated to increase pension liabilities by as much as 6%
to 9% on average for a given DB plan sponsor. Looking across the top 100
corporate pension plans by assets, this small-seeming increase in new liabilities
translates to a whopping $140 billion of additional funding required.
“Plans will have to start funding this new shortfall, and it’s
at the same time Pension Benefit Guaranty Corporation premiums have jumped 30%
or more in just the last year, and they’ll only continue to go up in the
future. It’s all just putting more pressure on sponsors to run for the door.”
4. Fundamental
fixed-income changes
“It won’t be news to anyone in the audience that, while
fixed income has generally been on a positive bull run for the last 40 years,
offering a great counterbalance to equity investments, right now the
environment is really tough for finding yield,” Wilson observed.
Add to this the Herculean task of trying to identify the
timing of a rate hike from the Federal Reserve, and you’ve got a truly
challenging environment for fixed-income portfolios.
“In the face of all this, we’re working with sponsors to
rethink fixed income,” Wilson noted. “We see many more sponsors looking at
things like unconstrained bond funds. Or perhaps they’re looking to add a ‘core-plus’
fund that can look beyond government bonds and mortgage backed securities into
other, higher yield areas. We’re also seeing a great and growing interest in ‘white-labeled’
fixed-income options, through which the sponsor seeks both higher yield and
better diversification.”
5. Longevity challenge
or longevity bonus?
Retirement plans are complicated beasts, but that doesn’t
mean the challenges they face are intractable.
“One of the main challenges we face is a simple one,”
McLaughlin observed. “People are living longer, and that makes it harder to
generate steady income and dependable income for their entire retirement. People
today are expected to live to 80 years for men and 88 for women, but they’re
not preparing for that type of lifespan.”
McLaughlin said studies consistently show more than half of people
underestimate their own life expectancy.
“We all have a tendency to believe we’re not the special
ones who will live as long as the actuaries predict, but the reality is that
that many of us will live longer than we expect to, maybe even a lot longer,”
he noted. “So the question becomes, is this a longevity bonus or a longevity
challenge?”
6. Multi-manager product
growth
Wilson next pointed to the growth of multi-manager investment
products as a key trend reshaping the way plans do business.
“In brief, the emergence of more customizable qualified
default investment alternatives (QDIAs) is having a profound impact on the way people
are thinking of their default investment,” he said. “Following a series of tips
and guidance from the Department of Labor, we have seen huge drops in the
numbers of sponsors using the proprietary target-date fund series of their recordkeeper,
for example, and this will only heat up in the years ahead, both up and down
market.”
Some benefits of the multi-manager approach include gaining
access to best-of-breed managers across the different asset classes built into
an asset-allocation solution, as well as the ability to make changes to certain
pieces of an asset-allocation solution without having to change out the entire
fund.
7. Client experience as
key differentiator
“Client experience is the sum of what the participant takes
away from their interactions with the plan and its service providers,”
McLaughlin explained. “It combines the emotional side of things with the
objective side of things.”
McLaughlin suggested that, more and more, the retirement
industry is seeing “the experience of saving and investing itself as the
product. It’s not how financial services firms traditionally think, but it’s a
huge factor in today’s market competition.”
This means ease of doing business has become a key determinant
of client experience, as has proactive service and anticipating client needs
and being responsive.
“Second, it’s the people—the people being effective, not
just nice or friendly,” McLaughlin said. “Third, it’s the feeling of commitment
and partnership. Something remarkable we see in the retirement space is that when a service provider makes a mistake, they can actually use this as an
opportunity to grow customer loyalty by effectively solving the issue and
proving they are a reliable partner, even when there are speedbumps. Of course,
it’s not always easy to recover from a mistake—and if you string problems
together the advocacy tanks.”
8. Fee compression
continues
“The ongoing review of administrative fees and other plan
expenses keeps growing in importance, and this isn’t like to stop,” Wilson
noted. “We’ve all seen the Tibble vs. Edison ruling—it’s just the latest example of
the increased scrutiny of fees.”
Wilson pointed to statistics showing a third of all plans
reduced fees in some way last year—and almost 20% changed how they pay fees.
“Fee compression and scrutiny is not just occurring on the mutual
fund side—it is also impacting collective investment trusts and all the other investment
vehicles in DC plans. Revenue sharing is going down and fee levelization is going
up.”
9. Financial wellness
rapidly expanding
McLaughlin said he defines financial wellness a little differently
than others.
“Financial wellness to me is being protected against risks
that are difficult to predict and may have significant negative consequences,”
he explains. “Part of this is what we normally think of as financial wellness—teaching
the employees to do better budgeting and to prioritize savings—but it’s also about
managing the big risks participants face before retirement.”
According to McLaughlin, these are loss of income due to
premature death of a spouse, loss of income due to illness or injury, and unanticipated
out-of-pocket costs for health events.
“Beyond providing more basic financial education for people,
the retirement market is growing in interest for protection products in these
areas,” he said.
10. Use of alternatives
continues to grow
Wilson concluded the session by noting alternative
investments are increasing in use, and the tenants of the alternatives conversation
are changing.
“Sponsors are learning that alternatives are not a group of
really aggressive or risky investments,” he said. “It’s all about
diversification and finding ways to mitigate volatility. For investment
managers hoping to grow in the space, it’s critical to work with plans on the role
of alternatives—sponsors and participants. Again, people think of them as
risky, but really alternatives are striving to diversify and solidify returns. They
offer risk mitigation and can help protect during equity drawdowns. We’re not
at a tipping point yet but in the next 24 months alternatives will continue to
gain more of the DC universe assets.”