Investing March 7, 2017

Dynamically Managed TDFs Paired With Higher Deferrals Equals Superior Results

GMO looked at the performance of various TDF factors over a 40-year period to help guide TDF selection.
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GMO took a look at several variables retirement plan advisers and sponsors can consider when selecting a target-date fund—such as active versus passive, level of risk, dynamic versus predetermined glidepaths and custom versus off-the shelf—and how these factors would have resulted in outcomes for the 40-year period between 1975 and 2015.

Other factors that GMO looked at included: proprietary underlying funds versus open architecture, traditional versus alternative investments, “to retirement” versus “through,” and auto escalation versus not.

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In “Target Date Decisions, Decisions … Getting the Biggest Bang for the Buck,” GMO concludes that dynamic allocations paired with higher-than-typical deferral rates can result in significantly better outcomes for participants—and that these are the two most important factors that sponsors and advisers should consider when selecting a TDF and the plan design around it.

GMO also found that passively managed investments should be included in TDFs, noting in its white paper, “It is clear from the scoreboard that active management across this [40-year] time frame did not add value. The takeaway: Plan sponsors should not obsess about open-architecture active frameworks.”

NEXT: What level of risk should a TDF take?

GMO next looked at how TDFs with more conservative glidepaths would have fared compared with those with more aggressive approaches, and found a 6% disparity in performance—conservative TDFs ended up with 2% less assets and aggressive TDFs with 4% more. GMO concluded that whether a TDF has an aggressive or conservative glidepath should not be a driving force for sponsors’ and advisers’ selection of TDFs.

GMO notes that when TDFs first hit the market, they were designed with pre-determined glidepaths, which the firm believes is a faulty approach for an investment that can last 40 years or longer. GMO learned that dynamic glidepaths can increase a participant’s TDF balance by as much as 14%, making this a significant factor when choosing a TDF.

And increasing a person’s deferral rate by even a mere 1%, from 6% to 7%, can boost their balance by 11%, again, a factor that GMO believes is meaningful.

GMO concludes, “Based on our results, the two most promising levers appear to be adding a dynamic component to the glidepath and boosting deferral rates”—and if these two factors are combined, balances could increase by as much as 30%.

GMO’s white paper can be downloaded here.

Compliance March 7, 2017

State Run IRA Plans Targeted By Senate Resolution

The resolution states Congress disapproves the rule submitted by the Obama-era DOL related to savings arrangements established by qualified state political subdivisions for non-governmental employees.

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Senator Orrin Hatch, R-Utah, well known for his work on pension and retirement issues, introduced a joint resolution in the Senate aimed at dialing back Department of Labor (DOL) rules adopted under former President Barack Obama, which encourage states to set up defined contribution (DC) payroll deduction retirement plans for private sector workers.

It was only last August that the “old” Department of Labor (DOL) released its final ruling on state-run individual retirement accounts (IRA)s. The new rule was designed to assist states that are planning to or have already enacted laws requiring employers that do not offer workplace savings arrangements to automatically enroll their employees in payroll deduction IRAs administered by the states. It also applies to states that have enacted laws creating a marketplace of retirement savings options geared at employers that do not offer workplace plans.

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Important to note, the entirety of the joint resolution could fit in two tweets and simply states that “Congress disapproves the rule submitted by the Department of Labor relating to Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees, and such rule shall have no force or effect.” The resolution language does not speak whatsoever to any effort to actually get the rulemaking off the books. 

As such, it seems the Congress is more interested in dialing back the federal government’s active encouragement of states to create retirement plans to aide private sector workers whose employers do not offer savings opportunities—rather than somehow actually prohibiting individual states from creating their own retirement savings marketplaces, should they so desire. In this way the resolution may not end up having such a dramatic effect, but like a lot of other regulatory activity in Washington, this will take some time to fully play out.

The resolution probably is not surprising to readers: When the Obama-era DOL first put out the rulemaking there was some significant criticism, but many retirement industry professionals and observers viewed the rules at least somewhat positively, based on the fact that there is clear evidence that simply permitting an individual to save via payroll deductions can be a major boon to their retirement outlook. Still, the Republicans in Congress remain eager to overturn and reverse whatever Obama-driven regulations they possibly can.

Similar language has already been introduced in the House: In early February Representative Tim Walberg, R-Michigan, chairman of the U.S. House Subcommittee on Health, Employment, Labor, and Pensions, and Representative Francis Rooney, R-Florida, introduced two resolutions of disapproval to block the same regulations. 

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