Consultants Support Retiree-Focused Investment Options

To encourage retirees to retain their assets in their employer defined contribution (DC) plan, consulting firms suggest that plans add retirement education/tools (80%), allow distribution flexibility (77%), and add retiree-focused investment options (76%), according to a survey from PIMCO.

More than half of consultants actively promote or support DC plan sponsor interest in the following investment and insurance retirement income strategies:

• At-retirement target-date vintage(s) (79%);
• Cash management (64%);
• At-retirement target-date vintage(s) with distribution/payout focus (62%);
• Income/multi-sector fixed income (58%);
• Managed accounts (58%); and
• Target-date fund (TDF) that converts to managed account in retirement (51%).

Nearly two-thirds (64%) of consultants believe plans should offer a separate retirement tier in their investment lineups.

Consultants indicate that cost (87%) is the major concern that may stop DC plan sponsors from offering in-plan retirement income insurance products. In addition, more than half report insufficient government support (62%), communication complexity (59%), and portability (59%) as additional concerns.

However, if a DC plan sponsor decides to offer an in-plan retirement income product, the following eight characteristics for a retirement income product are seen as very important or important by more than half of consultant respondents: Liquidity (89%); inflation-protection (86%); no new incremental fiduciary risk (78%); IRA rollover-eligible (70%); low to little volatility (62%); qualified default investment alternative (QDIA)-eligible (60%); distribution sourced from income (56%); and equity exposure (54%). When asked what the preferred distribution yield is for a retirement income product, the vast majority of consultants (88%) believe either a 4% or 5% yield is desired. Further, more than half of consultants (58%) believe the distribution should be monthly, while 26% prefer for it be quarterly.

Consultants at the median suggest 80% of final pay as an overall income replacement goal. Assuming participants have Social Security but no defined benefit (DB) plan and no retiree medical insurance, consultants suggest at the median that DC plans alone should replace 65% of final pay. 

Regarding market effects on retirement income, at the median, consultants believe participants can lose 40% over 12 months with 30 years to retirement and still meet their retirement income goal, 20% with 10 years to retirement, 10% at retirement, and only 5% when 10 years after retirement.

Other investment recommendations

The majority of respondents (87%) recommend TDFs be used as a DC plan’s QDIA. When evaluating and selecting investment default strategies, consultants believe the top five important factors are fees (83%); glide path structure (82%); probability of meeting retirement income objective (65%); quality of underlying investments/managers (56%); and market risk mitigation (44%).  For plans with more than $1 billion in assets, consultants recommend custom TDFs (53%). The largest percentage of consultants recommend that plans with less than $1 billion in assets select packaged active/passive blend TDFs.

PIMCO says in each of the past four years, consultants have recommended a core lineup that includes 10 investment options: one capital preservation, two fixed income, six equity, and one inflation-protection option at the median. The majority of consultants (77%) believe that capital preservation strategies should remain active only, while nearly half (46%) believe the same for the fixed income asset class (this figure increased from 32% last year).

For equity management, the vast majority (95%) recommend a combination of active and passive management whether blended, multiple or mirrored choices. Nine out of 10 consultants support inflation protection, with the largest percentage (37%) suggesting “Active only” or nearly another third (32%) recommending an “Active/passive blend.”

Nearly half of consultants recommend adding white label/multi-manager strategies at some plan size for equity and fixed income asset classes. Further, nearly one-third recommend white label strategies for inflation-protection, alternatives, and capital preservation.

More than half of consultants do not recommend a brokerage a window (59%).

Other DC plan feature recommendations

Nearly all consultants recommend auto-enrollment (96%) of participants into DC plans and auto-escalation (93%) of contributions. Further, auto-catch-up was recommended by 42% of consulting firms. 

At yhe median, respondents recommend a 6% starting contribution rate within auto-enrollment. The largest share of consultants (41%) continue to favor a 10% auto-escalation cap in 2018, while 50% suggest a higher cap.

At least two-thirds of consultants recommend that clients consider re-enrollment of assets into the QDIA upon a significant investment menu redesign (89%), a plan merger (80%), introduction of a new QDIA (77%), or upon a recordkeeper change (67%). Consultants at the median report that 10% of clients have re-enrolled, and consultants expect an additional 10% to re-enroll over the next three years.