Investing July 26, 2017

DC Plan Menus Evolve to Meet Participant Demands

According to Manning and Napier survey data, as many as 27% of participants say they have actually proactively opted out of a TDF auto-enrollment at least once, because they feel they have the ability to make decisions for themselves.

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Shelby George, senior vice president for adviser services with Manning and Napier, kicked off a recent webcast by observing the incredible growth that has occurred since the mid-1990s in the target-date fund (TDF) marketplace.

“In 1994, when TDFs began, there were literally just one or two products on the market,” she noted. “Today there are some 60 TDF series available for plan participants, on our count, and the number continues to grow. This growth has been incredibly important in helping non-experts invest in much more effective and rational ways.”

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Since the mid-90s, the industry has seen great improvement in the due diligence support wrapped around TDF products, particularly on the “glide path evaluation and decision question.”

“The added sophistication has been really important for helping plan sponsors feel confident and participants get on a much better track,” George said. “We also know today that there are still some 40% of people who say they prefer to manage their money on their own outside of a TDF, so it’s also important to keep these folks in mind when creating the menu. These do-it-myself participants are engaged, and they are demanding tools and support as well.”

According to Manning and Napier survey data, as many as 27% of participants say they have actually proactively opted out of a TDF auto-enrollment at least once, because they feel they have the ability to make decisions for themselves.

“Opportunity has expanded for advisers serving as investment advice fiduciaries, alongside this trend,” George added. “The majority are acting in a 3(21) capacity today, and as we have more and more advisers take on fiduciary responsibility, we see sponsors engaging advisers to do due diligence on both TDFs and single-asset-class holdings.” The result is streamlined and simplified investment menus.

Chris McAvoy, product Manager for multi-asset class solutions, said he is encouraged to see advisers come to understand the critical importance of offering an appropriate qualified default investment alternative (QDIA) according to the unique needs of any given plan. Given his role at Manning and Napier, it’s no surprise he argued that automatically diversified and rebalanced investment funds will generally serve participants best.

NEXT: 20 funds or so remains the average 

“The current menu today stands around 20 funds, on average, and that has been stable. So it remains very confusing for the typical participant to understand how to invest their money across the menu,” McAvoy warned. “As we move forward, the adviser’s role can be to understand how the environment will impact the way we create plan lineups and to think about diversification and new opportunities for growth, alongside capital preservation. We have to understand that the expectations looking forward are not great, and people have to adjust their behavior accordingly.”

Craig Abbott, vice president and retirement plan consultant, closed the webinar by observing this is a unique time for designing and implementing defined contribution plan investment menus.

“This is a unique and exciting time for menu design … there are more tools and resources available now than ever before,” he said. “Financial wellness programs have already helped a lot of participants become more engaged with their finances, both on the investment side and beyond. Education materials are getting more robust, helping participants understand and identify appropriate approaches.”

He pointed out that, for a lot of advisers, a big part of their value proposition remains sitting down one-on-one with participants. “But there are more technology offerings available now to make this work much more practical and efficient—the robo-advisers and managed accounts, etc. These are helping plans go beyond what a typical TDF can do, and that is encouraging,” he explained.

Abbott concluded that “one other clear trend” is the shift away from “an exclusive focus on growing the plans and maximizing accumulation. There is much more of a focus on the spending phase and how we can help retirees address the new market realities of living in retirement. How can we make DC-based retirements possible over timespans of 20 or 30 years? We need to expand the number of retirement income tools we offer participants.”

Data and Research July 26, 2017

Investment Manager and Recordkeeper Changes Driven by Fees

The desire to reduce fees is the top reason DC plan sponsors cite for contemplating changes in investment managers and recordkeepers, a study finds.
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Plan sponsors’ desire to reduce plan costs is substantially impacting their approach to investment menu design and their relationships with defined contribution (DC) plan investment managers, according to findings from Retirement Planscape, an annual Cogent Reports study by Market Strategies International.

Overall, 7% of plan sponsors intend to add at least one manager to their investment lineup in the next year. At the same time, 2% plan to drop a manager and 16% intend to do a combination of adding and dropping managers.

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Linda York, senior vice president of Cogent Reports, a division of Market Strategies International, in Cambridge Massachusetts, tells PLANSPONSOR a new question was added this year about whether plan sponsors will continue to use existing firms for new mandates or award new business to new asset managers. “Our theory was plan sponsors are looking to award new business to managers they are already working with to add more investment options to strengthen bargaining power, rather than to be a small client to several firms,” she says, noting that the findings validated the theory.

Twenty-nine percent of plan sponsors intend to award new business to existing firms, while only 15% plan to pull business away—evidence that plan sponsors are concentrating their assets with the smaller number of managers they know, making sure they have the best bargaining power for lower fees and lower share classes.

According to a blog post written by York, in instances where plan sponsors say they intend to drop or reduce the number of investment options provided by specific investment managers, the desire to reduce fees/expenses (32%) outranks underperformance (26%) as the most common reason for the second year in a row. Large to mega plan sponsors are more likely than their peers with smaller plans to drop a manager due to asset class risk attributes no longer meeting requirements (26%) or to switch from an active manager to a passive manager (22%). In addition, this year there was a significant increase in the percentage of plan sponsors who would drop an investment manager because of negative media perception, driven by respondents in the micro plan segment (12%).

York explains that a companion study, Cutting Through the Institutional Marketing Clutter, found the majority of plan sponsors overseeing the investment menus in their 401(k) plans neither actively engage with nor actively seek information about investment managers on a regular basis. York says plan sponsors are largely looking to plan advisers and consultants rather than looking into investment managers on their own. Most likely, they have so many other job responsibilities, unless there is a performance issue, they wouldn’t initiate a review, she adds.

“We do know in larger segments of the DC plan market there is usually an investment policy statement (IPS) which requires specific review on a regular basis,” York says.

NEXT: Provider changes also tied to expenses and investments

The Retirement Planscape study also found only 15% of DC plan sponsors are contemplating looking for a new plan recordkeeper in the next 12 months. York says the top three reasons are plan investment fees, plan administration fees, and the quality of investment options.

According to the report, 15% of plan sponsors ranked plan investment fees as the No. 1 reason for contemplating a move to a new provider, while 32% include that reason in the top three. Plan administration fees was chosen as the No. 1 reason by 13% of respondents, and was a top three choice for 32%. Quality of investment options was ranked No. 1 by 9%, while 30% included this in their top three.

Overall service quality for plan sponsors was cited as the No. 1 reason for 9% of plan sponsors and in the top three for 22%. Overall service quality for plan participants was No. 1 for 5% and in the top three for 22%.

The research found that, when considering plan providers, the micro plan sponsors look for value and companies they trust while small to medium plans seek superior choice and flexibility with investment options. Meanwhile, large and mega plans hone in on best-in-class participant service and support.

Interestingly, according to the study, plan sponsors are turning from the big name providers to the lesser used. “The provider market has been dominated by two players for years. They are good at targeting specific segments of the market and good at working with advisers,” York says. “Now we are seeing firms not as well-known in the larger end of market offering services or marketing services that sponsors need and picking the target market segment they feel they’re best suited to serve.” She notes that these providers realize they can’t be all things to all people, so they are working with the advisers they need or investing in technology and infrastructure to make an impression on larger plans.

“Dominating providers have competition with providers who can claim expertise in a particular segment,” York concludes.

An online survey of a representative cross section of 1,422 401(k) plan sponsors across micro (less than $5 million in assets), small to mid ($5 million to less than $100 million in assets), and large to mega ($100 million or more in assets) plans was conducted from March 22 to April 17, 2017. Plan sponsor survey respondents were required to have shared or sole responsibility for plan design, administration or selection and evaluation of plan providers, or for evaluating and/or selecting investment managers/investment options for 401(k) plans.

Information about other findings in, and how to purchase, the latest Retirement Planscape report is at http://landing.marketstrategies.com/retirement-planscape-2017.

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