Investment Consultants Recommend Custom TDFs

Others (8%) base their views on whether custom is appropriate for the situation based on specific client factors. Nearly three-quarters (74%) of firms believe it makes sense for plan sponsors with $500 million or less in plan assets to consider creating their own custom strategies. Only 8% of firms believe $1 billion or more in plan assets is needed for custom strategies.  

Over two-thirds (71%) of consultants believe that a custom approach to target-date funds would improve current packaged products. Less than one-quarter (21%) believe there is plenty of choice among current packaged target-date funds.  

Consultants believe the top three reasons not to implement custom strategies are difficulty of operational setup, time required to implement and fear of liability, insufficient asset size and asset allocation setup and oversight is too demanding.  

In order of importance, consultants report that plan sponsors consider these factors as they evaluate target-date or target-risk strategies: glide path structure, fees, active vs. passive, breadth of underlying investment and performance. Consultants report the following as the most common approaches to benchmark target-date or target-risk strategies: peer group comparison, investment manager index composite and consultant-created index composite. 

An increasing percentage of consultants (65%) believe that tactical asset allocation is a critical to somewhat important component of glide path management. Only about a third (35%) of firms said that tactical asset allocation is not important. 

The majority of consultants (78%) believe that investing in Treasury Inflation-Protected Securities (TIPS) is the best risk mitigation approach within asset allocation strategies. Nearly two-thirds of consultants (64%) recommend reducing exposure to assets with highly uncertain outcomes.  

Almost two-thirds (65%) of consultants feel that current glide paths are somewhat to highly appropriate, whereas over one-third (35%) believe that current glide paths are somewhat to highly inappropriate (i.e., too aggressive).   

Over three-quarters (78%) of consultants believe that the allocation to risk assets (e.g., equities) for those at retirement age (e.g., 65) should not exceed 40%. Nearly one-third of consultants (32%) believe that the glide path should reach its lowest risk allocation (e.g., equities) between the ages of 71 and 75. Just over a quarter (26%) of consultants believe the lowest risk should be reached earlier, between ages 66 and 70. Notably, 16% of consultants cited other factors, such as demographics and retirement age, as driving factors.  

There is general consensus among consultants when it comes to loss tolerance for participants at different ages. Almost all consultants cited a loss tolerance of more than 30% at age 25, up to 30% at age 35, up to 20% at age 45, up to 10% at age 55, and between 0% and 5% at the age of 65. 

Almost two-thirds (64%) of firms believe that managed accounts should be an opt-in asset allocation choice only, whereas only 15% believe that managed accounts should be an opt-out investment default (plus opt-in choice). Notably, five firms (13%) believe managed accounts have no role in a  defined contribution (DC) plan.  

The majority of consultants believe that active management makes sense for all asset classes except large-cap U.S. equities and TIPS. Consultants report that the most important asset classes to actively manage are non-U.S. bonds, emerging-market equities and global asset allocation strategies.  

Nearly all (90%) consultants believe that lower cost is the most common factor driving interest in passive investing followed by legal concerns (57%) and communication simplicity (47%).  

Investment management firms believe that emerging-markets equity (67%), followed by commodities (60%) and then absolute return (including unconstrained equity and fixed income) (57%) would bring the most value as added asset classes within the core or as an addition to an asset allocation strategy.  

Over half (52%) of consultants believe that adding global fixed income strategies may enhance plan sponsors’ DC equity offerings. Nearly half (48%) believe that adding global equity and non-U.S. (emerging market) strategies may enhance DC equity offerings, while close to half (45%) suggest that combining equity styles (value and growth) may help. Nearly one-third of consultants (29%) suggest adding a global unconstrained strategy.  

The majority of consultant firms (72%) believe that over the next two years it is somewhat likely to highly likely that at least some clients will add a retirement income investment option to their DC plans. Twenty-eight percent believe it is unlikely. Consultants said that retirement income products most likely to attract client interest are stable value, diversified income and a systematic withdrawal program. Consultants’ primary concerns with offering in-plan annuity products include transparency, insurance company default risk, cost and portability.   

The PIMCO DC Practice "2012 Defined Contribution Consulting Support and Trends Survey" captures data, trends and opinions from 39 consulting firms across the U.S., which serve over 3,600 plan sponsors with aggregate DC assets of more than $1.8 trillion as of December 31, 2011.