Administration December 27, 2017

How Plan Sponsors Can Use Research and Surveys

Data and research from providers and industry groups can help plan sponsors make more informed decisions.
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“Research is important because plan sponsors have a duty of oversight to manage the plan on behalf of participants: using data and research helps them fulfill their fiduciary obligations,” says Steve Utkus, principal and head of the Vanguard Center for Investor Research based in Malvern, Pennsylvania.

He notes that, in business in general, there is a move to use data to make better decisions. Retirement plan sponsors also feel the need to use data and insights to be better decisionmakers.

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“Research is a great way to check in on employees’ specific needs and the trends impacting the retirement plan marketplace,” adds David Ray, senior managing director and head of institutional retirement sales at TIAA in Dallas. “Research can identify issues that are not coming to the surface in other ways, but it can also validate for plan sponsors what they are doing and motivate action if they are not doing helpful things.”

For example, Ray says, TIAA surveys have highlighted information about Millennials. “As they become a more dominant demographic in the workforce, how they think about retirement is important,” he says. TIAA found Millennials think differently about retirement. They are focused on how expensive long-term care will be and they don’t believe Social Security will be there for them. TIAA research found only 36% of Millennials think Social Security will still be a source of income for them.

In addition, Millennials are more likely to purchase an annuity (34%). “Plan sponsors can see that providing guaranteed income streams and offering features that encourage more savings in retirement plans are things Millennials can take advantage of,” Ray points out.

According to Utkus, at Vanguard, the research team uses white papers, research notes and infographics to report about general trends shaping retirement plans, but there is also a consulting arm that provides client-specific data to support these trends. Relationship managers and consultants deliver this information electronically and face-to-face.

For example, Utkus says, an ongoing plan design question is whether to adopt automatic enrollment and how to implement it. “So we continue to publish an overview of auto enroll trends, and an annual statistical update—our How America Saves report—but our consulting arm can also help by looking at a plan sponsor’s own plan demographic data to customize this decision for plan sponsors,” he says.

Ray notes that some research can also point out gaps in what plan sponsors see as effective ways to help retirement plan participants reach retirement goals and what they actually have in place. For example, TIAA’s Not-for-Profit Plan Sponsor Insights survey found although 68% of sponsors believe targeting education to specific age groups is effective, only 31% do it. Furthermore, only 20% track participant data by age group. And, although 21% of sponsors said tracking income replacement rates is important, only 14% do so.

“Income replacement rates are important to measure. There are tools that can help employers determine that,” Ray says. “In addition, plan sponsors can tie findings into specific education strategies, helping participants increase contributions or change investment allocations.” He adds that the survey found gamification has shown to be very effective at educating and driving participant engagement and leads to better outcomes and decisions.

Re-enrollment is one way to help employees save and have the right investment portfolio diversification. Utkus notes that Vanguard research has shown this.

Research helps with plan design decisions

Among other research that has helped plan sponsors with plan design decisions is Vanguard data about company stock as an investment option in retirement plans. Its research shows that has declined in general, but prominent companies are still offering it. The research report also offers alternative strategies to reduce the use of company stock.

In addition, a few years ago Vanguard researched trends toward offering managed account advice. Utkus says a number of plan sponsors used that research to determine whether to offer managed accounts and how to gauge effectiveness. They worked with consultants or relationship managers to come up with their own strategies.

According to Utkus, retirement plan sponsors have pondered the question of whether their plans should become the destination for participant accounts in the decumulation phase in retirement. Research shows 80% of people leave their retirement plan after five years of retirement. “If plan sponsors made their plan more attractive for retirees and got rid of archaic plan rules that have inhibited participant behavior, more might stay in the plan,” he notes.

TIAA research shows participants desire guaranteed lifetime income solutions. The 2017 TIAA Lifetime Income Survey finds more than half (56%) of Americans who are not retired say the most important goal for a retirement plan is to guarantee money every month to cover living expenses. Given a choice between receiving a $500,000 lump sum at retirement or getting $2,700/month for life, 62% would choose the monthly income.

However, even though Americans want steady income throughout their retirement, only 32% of those surveyed say their retirement plan includes access to products that provide monthly income in retirement. Among those who don’t have access or aren’t sure if they have access to such products, half would like such an option.

Data and research from providers and industry groups can help plan sponsors make more informed decisions. “Plan sponsors have more data than ever to use, rather than relying on hunches or guesses,” Utkus says.

“You have to do a lot of diagnosis before providing prescriptions, and providers offer that to plan sponsors,” Ray adds.
Investing December 26, 2017

Tactical Asset Allocation Can Protect TDFs From Market Disruptions

However, only small portions of TDFs should be designated for tactical asset allocation.
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The wisdom of setting a predetermined glidepath for the asset allocation trajectory of a target-date fund (TDF) that can span 30 or 40 years could be questioned when there are disruptions in the market. This is why some TDF providers are dedicating modest amounts of their portfolios to tactical asset allocation.

SEI Institutional had long been applying this investment technique to its defined benefit plans, says Jake Tshudy, director of defined contribution investment strategies at SEI, in Oaks, Pennsylvania. This prompted the firm five years ago to create the Dynamic Asset Allocation Fund as one of the underlying funds in its target-date fund series, Tshudy says.

The TDFs allocate up to 10% of their assets to the Dynamic Asset Allocation Fund, but like equity exposures, this allocation declines as participants approach retirement, he says. To reduce trading fees, the fund uses an options overlay.

“Glaring economic disjoints” guide the fund’s investments, Tshudy says. For example, the fund has recently gone short on the Euro and long on the U.S. dollar. “At the same time, if we decide there is a longer-term opportunity with high yield and emerging market debt, we might make those trades in the fund if we think we are going to hold those positions for a long time,” he adds.

Nonetheless, SEI believes its TDFs’ glidepath is “the most important component” driving their investments. In addition to the inclusion of the Dynamic Asset Allocation Fund, the TDFs “do have some funds that are actively managed” but the allocation is managed “from a top-down perspective,” he says.

Likewise, the TIAA-CREF Lifecycle Fund series includes a tactical asset allocation program that it has modestly added to the series over the past two years, says John Cunniff, managing director at TIAA and manager of the funds, based in New York. “We won’t deviate more than plus-five or minus-five” to the program, he says. “This will never be more than 10% of the relative tracking error. We never want the tactical allocation to overwhelm the funds and, therefore, do not have wide limits.”

Ten years ago, there were only a handful of investment managers including tactical allocation in their TDFs, Cunniff says. Today, half of the TDFs on the market include this investment strategy.

Cunniff says the reception from retirement plan advisers and sponsors has been positive. “In meetings, when we bring up the tactical element, everyone is always interested in where the markets are today, and it leads to a fair amount of conversation about it,” he says. “The reality is, the overall strategic asset allocation [of the glidepath] will be the primary contributor” to the TDF series’ investments. “This is followed by the relative performance of the underlying portfolio managers, and then the tactical element.”

Cunniff says Morningstar data has shown that TDFs with tactical allocations slightly outperform those that do not have such allocations.

The cautious approach that SEI and TIAA take to tactical allocation inclusions in their TDFs is echoed by Prudential Retirement’s Day One Mutual Funds target-date series—but unlike other TDF managers that review their allocations on a quarterly basis, Prudential typically does this annually, says Doug McIntosh, vice president, full service investments at Prudential Retirement, in Newark, New Jersey.

“Our strategic glidepath governs our thinking, with a steep risk-off 10 years before retirement,” McIntosh says. “We typically have made small tactical moves away from the glidepath—to equities, fixed income, commodities, real estate, Treasury Protected Securites—in response to long-term capital market assumptions. We are typically in the 50 to 100 basis point range on alpha and maybe 1% on volatility. That is not to say that if we saw a major market dislocation or geopolitical event, we would not permit the funds to have the ability to move more frequently.”

That said, according to McIntosh, Prudential believes it is important to remain committed to the glidepath, so that plan advisers and sponsors can remain confident that it will remain true to the “basic philosophical assumption we have staked out that the Day One Mutual Funds will be more highly invested in equities in the early years and lower in the later years, to protect investors from behavioral risk as they approach retirement. Our careful work as an industry in trimming a little bit of emerging market here and expanding holdings in fixed income will not matter if we don’t keep people invested, so the strategic glidepath really matters.”

Additionally, McIntosh continues, commitment to a glidepath is important for both advisers and sponsors: “If there is evidence of a manager who jumps around too frequently and by too much of a degree, it will make it much harder for a consultant to tell a plan sponsor that fund will still make sense 10 years from now.”

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