Investing November 29, 2021

CITs, Retirement Income Products and ESG Investing Poised for Growth

Asset managers polled by Cerulli Associates reported trends they see for DC plan investments.

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As registered investment adviser (RIA) aggregator firms continue to acquire smaller players in the defined contribution (DC) space, investment managers are starting to take notice of their growing influence in deciding DC plan investments, a recent study suggests. There has been a shift in distribution dynamics as many RIA firms look to centralize their investment analysis and research.

According to Cerulli’s “U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities” report, many aggregator firms have taken an institutional approach to their investment decisionmaking process, centralizing the due diligence and investment analysis at the home-office level. By doing so, they have taken much of the investment research and analysis responsibilities out of the hands of the firm’s field advisers, enabling them to spend more time helping plan sponsors with their plan design, participant education and communications, and recordkeeper oversight.

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In addition to centralizing the investment research function, some RIA aggregator firms are leveraging their scale and investment expertise to create their own 3(38) investment manager open-architecture, white-label investment products and solutions. The report notes that 66% of managers believe aggregators have become a primary influencer in deciding DC plan investments in the $25 million to $250 million segment, and that rises to 68% for the $250 million to $500 million range.

“Managers that understand the investment decisionmaking process, adviser concerns and potential platform changes on the horizon will be well-poised to capture plan assets controlled by RIA aggregators,” says senior analyst Shawn O’Brien.

CITs Poised for Growth

Key DC plan decisionmakers, including advisers and consultants, continue to favor collective investment trusts (CITs) due, in large part, to their relatively low-cost structure and pricing flexibly, the Cerulli report notes. The firm recommends that target-date managers strongly consider CITs for their future target-date series launches.

The vast majority (92%) of managers currently offer a target-date series in a CIT, and 2021 has seen the use of CITs grow in place of other, traditional funds as the retirement vehicle of choice. Nearly all (97%) CIT providers cite lower costs as a very important factor when developing their CIT products. Other factors considered in development and distribution of CITs that managers found very important include having an additional vehicle offering for the existing investment strategy (78%), the ability to negotiate fees (72%), the ease of distribution (47%) and the speed of product development (38%).

In recent years, many CIT providers have lowered their investment minimums and, in certain cases, waived them altogether. Cerulli’s report finds that those with low or no investment minimums are more tenable investment options for smaller plans and advisers and could help promote stronger adoption down market.

Retirement Income

Retirement income remains a prime area of focus for asset managers and plan fiduciaries, as industry experts note there is no “one-size-fits-all” retirement income product or solution. Asset managers believe target-date funds (TDFs) with a retirement income vintage are most likely to capture the greatest new flows for in-plan options (38%), followed by a dynamic product (22%). Dynamic qualified default investment alternatives (QDIAs) that start participants off in an accumulation-focused vehicle—e.g., TDFs—before automatically transitioning them into a managed account offer participants the benefits of personalization as they approach their retirement years.

Slightly less than a quarter (21%) of target-date managers offer a target-date series with a guaranteed income component. Providers note that some plan sponsors are beginning to adopt TDFs with a guaranteed income component, but adoption is still far from widespread, Cerulli says.

Most defined contribution investment-only (DCIO) asset managers (63%) indicate that greater interest in retirement tiers will have a positive impact on their business. Plan sponsors looking to implement retirement tiers are likely to exhibit an interest in helping their retired employees navigate the retirement phase of their lives and may look to offer a suite of customized and off-the-shelf retiree-focused investments.

ESG Investing

A shift in political attitude has placed environmental, social and governance (ESG) investing back in the spotlight, Cerulli notes. Further guidance from the Department of Labor (DOL) may help plan sponsors and their fiduciary partners navigate their decisionmaking process as they implement ESG investment products.

Cerulli found that 65% of retirement specialist advisers believe ESG products will gain broader adoption in the DC market in the coming years, and 67% of asset managers believe interest in ESG investing will have a positive impact on their DCIO business, up 20% from last year. Despite a proliferation of ESG investment products, DC plan fiduciaries have historically been hesitant to offer ESG-branded investment products.

Several TDF managers indicate they plan to incorporate ESG principles into their investment process moving forward. The Cerulli report notes that many DC-focused asset managers run ESG screens on their investment products and third-party subadvisers regardless of whether their investment product is ESG-branded.

Retirement specialist advisers, on average, expect to add an ESG investment option to the plan menu for nearly one-quarter (22%) of their DC plan clients. The new, softer DOL stance on including ESG investments in plans covered by the Employee Retirement Income Security Act (ERISA) will likely help ease barriers to adoption within the ERISA-covered DC space, Cerulli notes.

Administration November 29, 2021

The Importance of Good Data for DB Plan PRT Activities

While clean data is important for identifying deaths and locating participants and beneficiaries, it can also have a great cost benefit for plan sponsors implementing pension risk transfer activities.

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It’s important for plan sponsors to have clean data on defined benefit (DB) plan participants to help them identify and validate deaths, locate participants and beneficiaries, and manage uncashed checks, according to speakers at a webinar, “The Data Dilemma: The Impact Bad Data Has on a Pension Plan,” presented by Pension Benefit Information (PBI) Research Services and DIETRICH.

Mike Irey, director of operations at PBI Research, told webinar attendees that plans can have inaccurate or missing personal identifiable information (PII) when data in older administrative platforms does not get updated or get carried onto a new system, or when data gets input incorrectly. A PBI Research study found 5% of all participant or beneficiary data is likely inaccurate or missing.

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He said missing or inaccurate Social Security numbers can have the biggest and most severe impact, because they are often used to verify other information about a person.

“Plan sponsors can more easily clean up other data if they have the right Social Security number,” Irey said. “And to correct a Social Security number, the plan sponsor needs an accurate first and last name, date of birth and location—usually city and state.”

According to Irey, PBI Research found that having an inaccurate or missing Social Security number resulted in the highest likelihood of missing a participant’s death. “A study we did found a missing or inaccurate Social Security number resulted in 90% fewer found deaths,” he said.

Bad data can cause overpayments, added Geoff Dietrich, executive vice president at DIETRICH, especially if a plan sponsor doesn’t know a pensioner has died. He said doing regular death checks is a best practice.

It is easier to correct first and last names than other information, Irey said. He noted that the most common reason last names are wrong is an unreported marriage. “People are more likely to open communications if it has the right name on it,” Irey said.

Further explaining the importance of accurate PII, he noted that having a correct date of birth is not as big an issue when trying to locate a participant or beneficiary, but it makes verifying a death more difficult. A missing or inaccurate address is the least impactful dilemma, and the easiest to correct, he said, but a plan sponsor might have to spend extra money if an erroneous address results in multiple mailings.

Irey suggested plan sponsors use commercial databases to clean up data. Responding to an attendee question, he said about 90% of participant or beneficiary deaths are found using the Social Security Administration’s Death Master File (DMF)—and they are usually found within the first four days of death. However, Irey said the highest percentage of found deaths are through obituary searches. “We found a 0.08% error rate using the DMF, but our obituary search has a 0.05% error rate,” he said.

Clean Data for PRT Transactions

While clean data is important for identifying deaths and locating participants and beneficiaries, Dietrich told webinar attendees that his firm sees the application of data every day with pension risk transfer (PRT) activities—i.e., the offering of a lump-sum distribution window or the purchase of an annuity. “More benefits are settled via lump sums than annuities, and, with annuities, the transition to an insurance company is for the life of the benefit, so having good data is important,” he said.

When it comes to PRT activities, bad data can mean plan sponsor staff members have to spend more time cleaning up data or trying to communicate with participants and beneficiaries. It can also result in extra cost for mailings, project delays and even contract delays, Dietrich explained. “Time is money. A delay of communicating with participants can delay the contract with an insurer,” he said.

Bad data can also affect liability calculations, which are based on a participant’s date of birth and life expectancy, Dietrich added. “If you think someone is a certain age and they’re 10 years younger, a correction will come at a cost,” he said.  

Having correct participant and beneficiary addresses is important to ensure the receipt of required communications, Dietrich noted. He said a lump-sum distribution can be 10% to 40% less costly for a plan sponsor than an annuity purchase, so sponsors want to get the highest take-up rate they can because it will save the plan meaningful dollars in an annuity purchase. “If you don’t have the right address, the participant can’t take a lump sum, so you will either have to include that person in the annuitization of liabilities or hand that person over to the PBGC [Pension Benefit Guaranty Corporation],” he said.

In addition, missing or unresponsive participants will limit the number of insurance companies that will bid on a plan sponsor’s liability, resulting in less choice and potentially higher costs, Dietrich said.

Knowing participants’ locations can save plan sponsors on PRT costs another way, Dietrich explained. “Over time, insurance companies and other data miners have gotten better at estimating how long participants will live. That comes into play with the price to purchase an annuity—insurers will estimate how long they will have to insure liabilities,” he said. “Today, insurers look at life expectancy on a more granular basis using [a participant’s] ZIP code or ZIP+4. Having that data will improve the costs for annuitizing liabilities. The less information insurers have, the more conservative they will be, which will cost more for plan sponsors.”

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