Investing January 13, 2016

No Big Expansion Expected of Alternatives Use in DC Plans

TDFs may be the main vehicle by which alternative investments in DC retirement plans are increased, suggests one researcher.
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Investment menus are contracting and being trimmed of “unnecessary” options, says Brian O’Keefe, director of research and surveys for Asset International, the parent company of PLANSPONSOR, who manages the PLANSPONSOR Defined Contribution (DC) Survey among a number of other large annual research projects.  

“I think most people would agree that alternative investments will not be understood by the overwhelming majority of participants,” O’Keefe says. All things considered, he feels plan sponsors will be driven more in the coming years by their interest to streamline and simplify investment menus than their interest in adding the diversification benefits that alternatives can confer, adding it’s more likely that those participants who do understand them and do want to invest in them will be sent to a self-directed brokerage window.

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O’Keefe notes the last PLANSPONSOR DC Survey shows alternative investments—including private equity funds, hedge funds, and other alternative approaches packaged as liquid securities—are in place in just 4.6% of all DC plans. Mega plans are the likeliest to have alternatives on the menu, at 6.0%, implying the reach of alternatives touches more participants than the topline single-digit figure suggests. Interestingly, micro plans appear to use alternatives more often than large plans, at 5.1% versus 3.0%, respectively.

An important note is that the survey segregates real estate and real estate investment trusts (REITs) from the alternatives category, with take up of these investment options looking much stronger than the other types of alternatives. In fact, more than one-quarter of all plans (26%) offer some type of real estate investment. 

Perhaps the most important storyline in all this, O’Keefe says, is that some target-date fund (TDF) managers are starting to incorporate alternative investments into their asset allocation strategy products, “but we have yet to see how this will play out and/or whether it is a sound investing strategy or a poor one.”

NEXT: Alternatives marketing is taking off

Providers have in the last several years been arguing alternative holdings can help with diversification and improve participant outcomes, especially during times of rising interest rates and higher global volatility.

“It makes sense why target-date fund providers are moving down this path,” O’Keefe explains. Alternative funds are by their nature more exotic and unique from the customer’s perspective. Thus, a target-date fund that folds in a novel type of alternative investment approach is more easily distinguishable from the competition and generally more marketable and profitable to provide.

“Additionally, most target-date funds have very similar glide paths, so providers are happy to take a little extra risk in hopes that it will translate into higher return that can then be marketed against other TDFs,” O’Keefe concludes. Fund providers are comfortable taking the added risk because “most assets won’t move out of the TDF even if the fund under-performs the market.”

This highlights some of the positive and negative aspects of the highly influential qualified default investment alternative (QDIA) regulations that came into effect under the Pension Protection Act—passed nearly a decade ago. The QDIA rules got a lot more people involved in retirement planning, but it’s still a difficult fact for the industry to confront that the majority of TDF participants have been defaulted into their investments. Thus they have both a wide variety of investing skill levels and a wide-range of investment risk profiles. 

Taking it all together, O'Keefe feels it's unlikely that it's participants themselves who are driving the marked interest in alternatives from the grass roots. Rather, investment managers and advisers are framing alternatives usage as a developing best practice of diversification, generating increased interest from the top down.

Compliance January 13, 2016

No Clear Benefits Direction Given by President

For some in the employee benefits industry, what President Obama didn’t say in his State of the Union address was the concern.
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While President Barack Obama recognized the changed retirement landscape in America with his remark, “The only people who will work for 30 years with health care and retirement are sitting in this chamber,” most of his comments about retirement and health care were general.

There was no announcement of specific initiatives or proposals, such as the myRA program announced in his 2014 address or the tax proposals regarding retirement plans released after his 2015 address. There was also no mention of the controversial rule about conflicted investment advice to be proposed by the Department of Labor.

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Obama did say American workers shouldn’t lose what they’ve worked so hard for, so he called for Congress to strengthen Social Security and Medicare. He also advocated for the portability of benefits, saying portability was one intent of the Affordable Care Act (ACA) and that when people move from job to job, their retirement benefits should go with them.

Some in the industry were concerned about what Obama didn’t discuss. The Alliance to Fight the 40, a broad-based coalition seeking to repeal the 40% excise tax on high-cost employee health benefits now set to go into effect in 2020, issued a statement following the president’s speech, saying “it is a shame he did not join over 300 bipartisan members of the House and Senate in calling for the repeal of the Cadillac tax on expensive health plans.”

NEXT: Industry thoughts

James A. Klein, president of American Benefits Council, a member of the Alliance to Fight the 40, said, "President Obama can still assert pride in his signature legislative achievement without defending every provision. The Affordable Care Act was advocated as building on employer-sponsored health coverage. Unless the Cadillac tax is repealed, it will erode the system that provides coverage to over 175 million Americans.”

Jason Hammersla, senior director of communications at the American Benefits Council, told PLANSPONSOR, “We thought the speech was more remarkable for what he didn't say. Namely, in a speech that was largely about unity and bipartisanship, he did not mention the repeal of the Cadillac Tax. Measures to repeal the tax have substantial support in both chambers of Congress—nearly 300 total cosponsors in the House, and 90 Senators voted for a repeal amendment at the end of last year—and the tax has already been delayed for two years.”

However, the Council sees the president’s call for retirement savings portability as positive. “The strategic plan document that we issued in September 2014 specifically calls for policymakers to ‘support voluntary, simple, portable model plans for retirement income or retiree health coverage,’ " Hammersla says. “The challenge is that there is some disagreement on the best way to provide that portability.”

Hammersla notes that the kinds of measures the president has supported in the past, such as state- or locally-managed retirement plans or the MyRA program, are somewhat detached from the employer-sponsored system, but account-based plans offered by employers lend themselves well to portability. “We believe that retirement plan portability is not incompatible with the employer-sponsored system that has been so strong and successful. The administration can help by giving employers the flexibility to design their retirement programs in such a way as to provide portability and transparency to employees while not creating additional compliance and administrative burdens or adding unnecessary liability exposure that makes it difficult for employers to sponsor plans,” he concludes.

NEXT: More efforts could be made

Joe Ready, head of Wells Fargo Institutional Retirement and Trust, told PLANSPONSOR, “While Retirement did not take center stage in last night’s State of the Union address, the President did clearly acknowledge some of the challenges we face as a country where saving for retirement is concerned, which underscores this issue as one that is not going away anytime soon.”

Ready says Wells Fargo sees the challenges faced by participants who are nearing retirement, as they seek to continue to grow their nest egg in anticipation of a long life in retirement, while also seeking to dampen volatility and minimize their exposure. “We’re talking more and more with plan sponsors that want to help people in this phase of their retirement journey—and there are things that can be done to make it easier for plan sponsors to help near-retirees with these concerns,” he says.

For example, Ready suggests safe harbors around in-plan annuity options could pave the way for more plan sponsors to feel comfortable offering these options to their participants who are looking for a guaranteed stream of income in retirement that is not going to be as vulnerable to market volatility.

Wells Fargo also recognizes the reality of today’s world where people don’t necessarily stay at the same job forever. “We’re also talking more to plan sponsors about options for allowing participants who are no longer with the company to keep their assets in-plan, if they choose not to roll over to an IRA or new employer 401(k),” he says. “This is beginning to make sense to a lot more plan sponsors as an option, and allows participants who change companies to continue to benefit from plans with institutionally-priced investments, and access to tools associated with these types of plans.”

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