Investing July 27, 2017

Plan Sponsors Looking to Enhance Fixed Income Strategies

In order to preserve capital and protect participants from longevity risk, plan sponsors intend to put a bigger emphasis on fixed-income strategies.

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Even though several plan sponsors are concerned about helping participants preserve capital especially as they near retirement, a study by T. Rowe Price show many can use improvement when it comes to executing fixed-income strategies.

The firm finds that fixed income on average receives only 18% of the allocation of time that plan sponsors spend on their plans. That figure is even lower for capital preservation (13%). When asked to name their top three concerns for fixed income investing, 93% named rising interest rates at the top followed by low yields (69%), and inflation (56%).

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Today, most sponsors offer stable value (80%) and core bond strategies (85%), but few offer global income strategies. Less than half (44%) offer a TIPS strategy or some other type of inflation-hedging strategy. Furthermore, 22% include global bond strategies or other inflation-hedging options, and only 4% offer unconstrained and/or absolute return strategies.

However, T. Rowe Price finds that plan sponsors are looking at the next 12 months as a period of change characterized by a widening focus on fixed income strategies. Fifteen percent intend to implement a multi-strategy/white label fixed income offering, 11% look to offer inflation-linked bonds or Treasury Inflation Protected Securities (TIPS), and 9% are eying unconstrained and/or absolute return fixed income offerings.

And while fixed income strategies can help any participant by offering diversification and protecting against market losses, it is especially important for older participants nearing or in retirement. According to T. Rowe Price, this population of the workforce is quickly expanding, raising the concern that many participants may be facing longevity risk.

Almost half (44%) of respondents to this T. Rowe Price survey reported a shift toward an older participant base compared to 10 years ago. A separate study of the plans that T. Rowe Price services as recordkeeper found that in the past decade, the percentage of participants at least 50 years old rose from 34% to 38%.

“The role of fixed income in defined contribution plans is becoming more complex because of shifting participant demographics, market and interest rate uncertainties, and the limitations of core bond strategies,” says Lorie Latham, senior defined contribution strategist. “The U.S. and global bond markets have developed over the past two decades to the point where they now offer investors many attractive opportunities to enhance portfolio diversification, improve returns while maintaining an eye on risk. While some of these levers have been underutilized in defined contribution plans, it appears that plan sponsors are growing more receptive to them, based on their stated intentions over the next 12 months. This could help plan sponsors address the longevity and inflation risks their participants face.”

Administration July 27, 2017

Advisers Responding to Plan Sponsor Demands

More advisers are offering services pertaining to financial wellness and HSAs.
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Tom Woods, senior vice president of sales at Fidelity Investments, says he’s seen the role of advisers change significantly in the last few years.

Woods observes advisers moving away from focusing on evaluating funds for a plan’s lineup and mitigating fiduciary risk and expanding their scope by offering a broader set of services to keep up with plan sponsor demands. These include playing larger roles in plan designs, educating and advising participants, and working with other plan stakeholders in a more strategic manner.

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He says services pertaining to financial wellness and health savings accounts (HSAs) are also appealing more to plan sponsors today.

“Plan sponsors are more and more inquisitive about these things and looking to advisers for guidance,” Woods says. “This presents tremendous opportunity to differentiate yourself from someone who may be only focused on lowering fees and selecting investments.”

Donn Hess, senior vice president, Lockton Retirement Services, observes a similar trend. While he notes there’s still a great demand for basic adviser services like mitigating fiduciary risk, especially in light of ongoing litigation in the space, he sees a growing demand for advice on programs around executive benefits and financial wellness.

“Financial wellness is such a huge topic and has so many moving pieces,” Hess explains. “I think a lot of clients are turning to their advisers for help in defining what their issues are and then narrowing the scope of the solutions and providers available.” But given the industry’s heightened scrutiny on fees, sponsors also want the price tag for these services to remain relatively low.

“As we have seen with defined contribution (DC) recordkeeping platforms, we’ve also seen fee reductions impact advisers, and their clients are expecting them to do more today than ever for the same or less amount of money, and that’s a real challenge,” Woods explains. He believes slashing fees alone won’t allow advisers to stand out, whether they’re independent or connected to large firms. “Advisers need to clearly define their value proposition,” Woods says. “Some make the mistake of just cutting fees and competing on price alone.”

Jamie Bentley, PIMCO’s senior vice president and national retirement sales manager, says advisers have also benefited from hosting local seminars offering plan sponsors continuing education credit, while providing insight on topics most pertinent to their plans. “This allows the adviser a forum to establish their credibility as a retirement plan expert and helps them to build a base a quality plan sponsor prospects,” he says.

Hess says Lockton has had success with recent summits and webinars about avoiding DC plan litigation, a topic that some of its university clients have reached out to the firm to learn more about.

“As the benefits industry becomes more sophisticated, clients are looking for advisers who are part of a network that can bring a more holistic solution,” Hess concludes. “So if I’m working with an adviser that knows people with expertise in health and welfare, that’s going to make the retirement advice more robust and they’re going to help you solve more problems.”

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