Through-Retirement DC Investment Options Uncommon

Even though annuities for DC were introduced in the mid-2000s, they gained little traction from plan sponsors since that time because of fiduciary protection issues, portability and comparability, according to a report titled “Asset Management Industry Market Sizing 2012-2017,” from Financial Research Corp. (FRC), a division of Strategic Insight.

PLANSPONSOR’s annual DC survey found that roughly 5% of plan sponsors in 2011 reported offering an “in-plan” guaranteed income option (i.e., a product that offers a certain amount of monthly income in retirement). Of the sponsors that did offer this option, nearly two-thirds (63%) represented plans with 500 participants or fewer. Less than 1% of plan sponsors (primarily smaller plans) offer an “out-of-plan” guaranteed income option.

The development of in-plan retirement income products and target-date fund (TDF) glide paths that go through retirement will help assets stay in plans longer, decreasing the potential for lower retention rates of asset managers within these plans when participants retire and roll over their savings, the FRC report said.

“The increased longevity risk has the potential to become a national crisis, so the potential manifestation of this crisis presents both opportunities and challenges for the asset management industry,” Amy LaFrance, senior research analyst at FRC and author of the report, told PLANSPONSOR. “Providers of different channels should better target solutions for specific markets.”  

Additionally, the report indicated that TDFs will experience a 14.4% asset -growth rate over the next five years (2012-2017), despite the scrutiny TDFs received during the 2008 financial crisis due to their level of equity allocations and risk exposure. According to Callan Investments Institute, nearly 70% of DC plans with a qualified default investment alternative (QDIA) option now use TDFs.

Although FRC expects TDFs will experience asset growth—as investors report their confidence in the ability of TDFs to help them achieve retirement goals—it seems to be a limited market for providers. Launches of target-date series are becoming more rare; in fact, three providers have exited the TDF industry since June, LaFrance said.

“With DC assets, projected by Strategic Insight, to reach $5.8 trillion by 2017—representing a 4.4% five-year CAGR (compound annual growth rate)—the recent exodus of TDF providers from the market is alarming,” LaFrance said. “However, the increased regulatory scrutiny, the fiduciary concern, and the litigation propensity of employees may be just some of the factors weighing heavily upon providers.”

To learn how you can get access to this study, please call 617-399-5629 or e-mail kathy.marshall@frcnet.com.