Investing September 30, 2015

Finding the Right Default

A prudently selected default investment can solve real problems and help plan sponsors feel more confident in automatically enrolling their participants.
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Our sister brand, PLANADVISER, held its national conference this week in Orlando. As part of one panel, a group of experts discussed the evolution of qualified default investment alternatives (QDIAs) and considerations for plan sponsors when making the decision between managed accounts, target-date funds (TDFs) and balanced funds.

The 2006 Pension Protection Act (PPA) ushered in use of QDIAs with a new safe harbor, said Jason Johnson, senior vice president of wealth management, UBS Financial Services, moderating the panel. “Many employers recognize that their employees don’t have retirement plans in place,” he said.

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Asset-allocation models and QDIAs allow sponsors to place participants in the plan with a safe harbor. Still, to get that safe harbor, plan sponsors must meet several conditions, including participant notification, allowing participants to opt out of the default fund and broad diversification on the investment menu.

Key challenges for employers, said Scott Wittman, chief investment officer (CIO), asset allocation and disciplined equity at American Century Investments, are the myriad risks to balance when saving for retirement. Putting everything into stable value or money markets might eliminate market risk, but this strategy can make longevity risk skyrocket.

One enormous change that took place with the move from defined benefit (DB) to defined contribution (DC), Wittman said, was all-professional decisionmaking. “In DC plans, the ultimate decisionmaker is the participant,” he noted. “The best designed plan in the world is not going to meet its goals if the participants can’t use it effectively.” Downside risk and excessive volatility both challenge participants’ judgement, Wittman added.

Glide path construction can help manage risk, said Benjamin Richer, director asset strategies, portfolio manager, Nationwide Funds Group. His group combines the three approaches—conservative, moderate and aggressive—into one glide path: more aggressive in the further-dated funds for younger participants. “In the middle of the glide path, we take a more moderate approach,” he explained, “and as the participant nears retirement, we’re more conservative than the market.”

NEXT: Customization could be the answer—but is it worth it?

The one-size-fits-all approach may not work much longer, said Brad Thompson, chief investment officer at Stadion Money Management. “We’re telling 35-year-olds now how to manage their money,” he said, “but going forward, they’re going to be telling us how to manage their money.” The rise of smartphone usage and Millennial attitudes indicate that plan participants will pay more attention to their accounts, and he believes Millennials will want custom solutions.

Another drawback to a single approach: Participants tend to set it and forget it. “So they don’t increase their participation rates,” Thompson explained. “That’s where managed accounts are starting to gain momentum, but target-date funds are getting most of the assets.” Implementing the customization and personalization features that Millennials want makes the funds attractive and can help get younger participants to enroll in the plan—and stay there.

Before going down the customized solution route, Wittman said, ask three questions:

  • What are the plan demographics? Most 25-year-olds have relatively small assets and their goals are similar. Participants in their 60s can have a range of goals, and assets tend to be more substantial.
  • Do you have enough information to customize? He cautions that customizing at the plan level is not useful.
  • Is customization worth the additional cost? “The focus on fees is intense,” he emphasizes. “It’s hard for plan sponsors to justify additional 20 basis points [bps] to get a customized solution.”

An increasing number of plan sponsors are interested in re-enrollment, Wittman said. The health of the plan, raising the participation rate and getting people engaged are all very important—and re-enrollment, a close cousin of automatic enrollment, is key.

True, added Wittman, many plan sponsors are afraid of negative pushback from participants—a concern he called legitimate but generally unfounded. Employees are most often very accepting, and auto-enrollment dramatically improves plan health. “One plan sponsor was concerned but did the re-enrollment of 1,500 participants anyway,” he said. “Exactly nine people called, six of whom wanted to know their PIN number.”

Investing September 30, 2015

In-Plan Lifetime Income

Most participants are interested in in-plan lifetime income options, but just one in five plan sponsors say the same. 
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Our sister brand, PLANADVISER, held its national conference this week in Orlando. As part of one panel, a group of experts discussed the latest retirement income planning trends in the defined contribution (DC) retirement space.

Panel moderator Jeb Graham, retirement plan consultant and partner at CapTrust Financial Advisors, asked the audience to supply a few numbers for the conversation. A quick poll showed very few retirement specialist advisers felt their plan sponsor clients would be open to wider in-plan income use, and slightly more “are aggressive about offering in-plan retirement income options to participants.”

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Panelist Jan Gundersen, managing director for product management at TIAA-CREF, suggested this is because DC plan sponsors have “traditionally only thought about accumulation—nest-egg thinking.”

“Today we are clearly seeing a demographic shift, and so many people are looking for guidance on how to spend money in retirement, participants especially,” Gundersen said. “For this to really take off we will need more plan sponsor interest, and that will only come when solutions become easier to understand, and they must fit with plan sponsor’s fiduciary role.”

Panelist Glenn Dial, head of retirement strategy for Allianz Global Investors, agreed with that sentiment, noting that interested parties should not dismiss in-plan income for DC plans. Portability challenges are very real, he said, but they can be addressed by skilled advisers and investment providers. 

“It’s not very popular today, that’s true,” Dial said, “but to get a sense for the pent-up demand that is out there, it helps to look backwards and consider the appetite for and usage of in-plan income during the earlier defined benefit [DB] paradigm. It was 100%. Everyone in the DB plan got guaranteed income for the rest of their life, and most people were just fine with that. I think the interest is clearly still there.”

Michael Gordon, another panelist and head of retirement insurance and the Strategic Solutions Group at BNY Mellon Investment, agreed, advocating for in-plan annuitization and other controlled withdrawal strategies that draw from the DB approach.

“We used to look at 4% as a safe annualized withdrawal rate for those people who wanted to control their own spending and who resisted annuitization—that meant you could spend each year $30,000 or $40,000 of every million dollars saved,” Gordon said. If you look at it this way, annuitizing a million dollars can be a pretty good deal when you consider the added guarantee. “It will also depend somewhat on the market and interest-rate conditions when the annuity in transacted, of course.”

NEXT: More DOL guidance is unlikely

Gordon said he looks forward to more innovative in-plan income solutions that can take into account DC plan participants’ home equity and other outside assets, because “any realistic solution here is going to have to account for both in-plan and out-of-plan assets. There are trillions of dollars outside DC plans that we can help people control and spend effectively.”

As Dial explained, part of the low pickup problem for in-plan income is regulatory: Most plan sponsors cite fears of fiduciary liability and uncertainty around how to pick and monitor annuity providers. However, in discussions with the Department of Labor (DOL) and the Treasury, he said, “they’re surprised that we have cold feet on advocating for in-plan income and that sponsors feel they don’t already have the fiduciary protections they need. They think that gave us a safe harbor already, and indeed they did. They want to know, what else do you think you need? They think they have given enough clarification and guidance.”

Gundersen concluded the panel by observing “there is no single problem in distribution the same way there is in the accumulation phase.” On the accumulation phase, plan sponsors can solve problems for many people at the same time, for example through auto-enrollment and auto-escalation.

“But with DC plan asset distribution, the risks are very different for different individuals,” he said. “Individuals’ priorities and preferences matter so much more on the spending side. How much of your income do you want to come from guaranteed sources? How much risk are you willing to carry for potentially more purchasing power later? These are all very personal situations, so the one-size-fits-all answer ‘save more’ is not going to apply.” 

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