Administration October 9, 2014

Too Early to Hit the PIMCO Panic Button

October 9, 2014 (PLANSPONSOR.com) – Plan sponsors should not be upset by outflows from the Total Return Fund and the abrupt departure of Bill Gross, PIMCO’s lead portfolio manager, sources say.
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Ebola is a bigger threat to the market right now than Bill Gross, according to Robert C. Lawton, president of Lawton Retirement Plan Consultants LLC in Milwaukee.

First, Lawton tells PLANSPONSOR, the months of outflows from PIMCO in no way resemble a run on an individual bank, and the situation differs greatly from previous examples wherein the falling out of an investment manager and his employer caused significant disruptions in firm operations. Lawton cites the example of Jeffrey Gundlach abruptly leaving TCW, where he headed the firm’s Total Return Bond Fund, to establish another firm called Doubleline Capital. “A number of people followed Gundlach from TCW,” Lawton says, “and so far no one is following Bill Gross to Janus.”

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Even though $23 billion flooded out of the fund during the last days of September, according to Lawton, there’s been no “mass exodus of funds” that he knows of. “I think most advisers would attribute the prior slow bleed to Mohamed El-Erian leaving, and Gross’s own erratic behavior,” Lawton says. In fact, he observes, it’s possible that PIMCO staff are “overjoyed at seeing Bill Gross leave.” Citing Gross’s several instances of bizarre behavior—the sunglasses worn at a conference, the public investor letter addressing his deceased pet cat—caused Lawton and many others to worry about his stability and what he was doing at PIMCO. “There was yelling and screaming and sending confrontational emails that were negative,” Lawton notes. “The fixed-income world is very conservative. Erratic behavior causes people to be nervous.”

Lawton also notes that Gross was listed as lead portfolio manager on 18 funds. “In order for him to do any of that work efficiently, there had to be had strong portfolio management teams in place on all of them,” he says, theorizing that it’s likely very little will change in the real management effort of those funds, even without Gross. “The actual management and day-to-day work done by Gross was probably pretty low.”

Succession Planning

The timing of Gross’s departure may have come as a surprise, feels Tracey Manzi, vice president of investments at Cammack Retirement Group in Wellesley, Massachusetts, but this should come as no surprise to the market. “At age 70, you start to worry about who is going to manage that fund,” she tells PLANSPONSOR. It’s good to look at succession planning to see if there is continuity and stability in an organization, Manzi says, noting that managers move from funds all the time.

“Someone of Gross’s stature makes the headlines,” Manzi admits, “but the strategy of the Total Return Fund is more important. I think the new management team is very strong and seasoned, and all have good long-term track records.” While the change in manager could be something to think hard about, Manzi says, “It doesn’t necessarily signal an automatic sell recommendation.”

Lawton agrees, noting some mostly encouraging signs that include PIMCO’s stability, and the extreme probability that the firm “probably had a succession plan in place for him at age 70 for quite some time, so they were not caught flatfooted by his departure.”

Lawton says very few plan sponsors are shedding PIMCO funds, and few are even offering replacement funds for the PIMCO Total Return Fund. He maintains that a majority of plan sponsors, more than 90%, are opting for a third stance: “They are standing pat,” he says, “communicating to their participants, either via email or hard copy, but nobody in the plan sponsor world is panicking.”

As Manzi points out, all investment committees on a retirement plan have a process to follow on how they will evaluate and monitor equities or fixed-income funds. Many place a fund on watch or review when there’s a manager change, she says, but it doesn’t mean they necessarily sell. “Long term, (the Total Return Fund) delivered solid returns for its investors,” she says.

Fiduciary Responsibility

From the standpoint of fiduciary responsibility, Lawton recommends plan sponsors think about what they’re not required to do. “They are not required to communicate about the suitability of investments,” Lawton says emphatically, “but that doesn’t mean they shouldn’t issue communications about PIMCO or the Total Return Fund.”

Communication about the future prospects of an investment does not fall under the type of communication plan sponsors are required to deliver, he says, if it is not company-issued stock. “But it makes sense to describe fiduciary process they have ongoing,” he says.

For instance, the company can deliver explanatory communications to plan participants about the investment committee, and what it does. “They are charged with evaluating investments in the plan, and the company has retained an investment adviser,” he says, “and together they are carefully monitoring the situation.” It would be inappropriate for employers to tell plan participants that they should stay away from PIMCO funds for six months, Lawton says, or that the funds or investments do not seem suitable.

Good communications describe the company’s internal fiduciary process that ensures appropriateness of the investments being offered, and that the company is performing appropriate due diligence along with the adviser. “Describe what is going on behind the scenes,” he says. “That’s the gist of good communications I’ve seen being issued.”

The worst-case scenario would be a truly significant amount of outflows from the Total Return Fund, Lawton says, and people will be awaiting results of the October outflows, due November 3. It could start another round of outflows and a domino effect, as plan sponsors say, “We don’t want to be the last ones in this fund,” Lawton feels. The estimates now are that 20% of the assets at PIMCO will probably leave. “If it is less on November 3, then that would seem like a very positive outcome,” Lawton says.

Lawton feels PIMCO is still a good place for fixed-income offerings, or other appropriate vehicles for a retirement plan, such as the commodity fund. “I can’t see a good reason why anyone is dumping the PIMCO funds,” Lawton says, citing their “deep bench” and strong management teams. “Anytime you do a knee-jerk reaction to almost anything in the investment world, it’s almost always the wrong thing to do.”

Administration October 9, 2014

Regulations Could Calm Fears About Income Solutions

October 9, 2014 (PLANSPONSOR.com) – With 25 years in the investment industry, Tim McCabe has participated firsthand in the dramatic rise of the defined contribution retirement system.
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McCabe has been with Stadion Money Management since 2003, guiding distribution of the firm’s discretionary 401(k) management services as national sales director. Before Stadion he was a vice president at Fidelity Investments, leading the Southeast region of Fidelity’s Institutional Retirement Services Company.

McCabe says the first three decades of work in the defined contribution (DC) retirement planning sphere focused almost exclusively on questions of asset accumulation. Plan sponsors would worry about providing quality funds on the investment menu, but less attention was paid to the way participants actually used those funds—and whether the plan design as a whole could make successful outcomes likely. Advisers and service providers, too, were largely focused on issues of accumulation, McCabe says.

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But with the aging and impending retirement of the Baby Boomers—basically the first generation to work something like a full career under the DC system—the industry’s attention is shifting at an accelerated rate. McCabe says decumulation is quickly becoming not just a subject of concern for older workplace retirement investors—it’s also the next frontier for industry innovators and opportunity seekers.

“This all comes out of the fact that the number one question and fear for a lot of people is, ‘Am I going to have enough money in the 401(k) to support myself for a lengthy retirement?’ ” McCabe explains. “Both for in-plan and out-of-plan lifetime income products, we’re seeing tremendous interest from literally all of the major providers in the industry, certainly all the partners we work with.”

Importantly, there is as of yet little consensus on the best way to do lifetime income, McCabe adds, both inside and outside the plan environment. This makes it difficult for participants to get affordable lifetime income, or even to get sound guidance about some reasonable income strategies, he says.  

And the list of hurdles goes on. A persistent low interest rate environment means any unit of lifetime income purchased today is going to be expensive in terms of the income it actually secures. What’s more, lifetime income products are complex and are not yet sufficiently portable to meet the needs of job changers and investors looking to roll their assets into a unified account. Finally, it’s far from clear how the Department of Labor (DOL) and other key regulators view the inclusion of lifetime income products on a plan menu.

“How do these products impact fiduciary liability for plan sponsors? This question is obviously top of mind for everyone involved,” McCabe says.

McCabe says the fiduciary issue will be a particuarly tough nut to crack without action from the DOL. “Many participants can be expected to draw on an in-plan lifetime income product for 20 or 30 years during retirement—would the sponsor be on the hook for paying the income if the providing insurer ever folded?” he asks.

McCabe and others in the industry say that, until there is some type of additional safe harbor established by the DOL, the take-up will remain relatively low for in-plan lifetime income. “It’s difficult to get these products to be accepted widely in the market, in spite of their appeal for participants,” McCabe continues. “We will need at least some type of initial guidance on these products first, if not an outright safe harbor.”

He says even the product providers who can usually be expected to resist new regulations from DOL are in favor of more guidance on in-plan lifetime income questions. 

“I sat in on a conversation with four major providers on this very question less than month ago. Overall, the feeling was, for all of them, that they would welcome additional legislation and regulation, and they’re actively lobbying on it so that they can get these products off the ground.”

Jeff Keller, McCabe’s colleague at Stadion and the firm’s director of defined contribution investment only (DCIO) sales, says this question always comes up in client meetings.

“No matter who we are meeting with, we are seeing a focus on the matter of fiduciary liability for in-plan lifetime income,” Keller says. “What’s the level of risk you take on when offering one of these products to plan participants? It’s somewhat unclear under current law.”

Keller anticipates that leaders in the industry will continue to push the envelope on what’s possible with in-plan and out-of-plan income guarantees. “Of course there are the questions that, as we develop the second and third generation of these products, we will need to address,” he explains. “But there is already big innovation going on, and the more innovative insurance companies will be able to solve these issues. I’m confident about that.”

Keller predicts the adoption of in-plan lifetime income will mirror the uptake of target-date funds (TDFs) within the DC industry. In the same way that TDFs exploded in popularity because they solve the specific (and critical) challenge of ensuring participants adjust their risk outlook as they age, lifetime income products can help solve the critical question of securing an income stream that won’t run out late in life. “So we know these products will be popular,” Keller says.

“We’re all familiar with the challenges that surrounded TDFs,” Keller continues. “We expect that, like TDFs, it will be difficult to name and benchmark lifetime income choices. Once we get five or 10 viable lifetime income options out there in the real world, they’re going to look very different from one another, so it will require a new literacy for the sponsors to differential these products. That could eventually be more important than the differentiation that needs to take place among the target-date fund universe today, I believe.”

Yet another important point is the timing of retirement, Keller observes.

“Where are we at in the market when that time for retirement comes and we look to purchase lifetime income for an individual?” he asks. “That’s another major topic and all the potential players in the market want to know what the other guys are doing to optimize that process. Buying lifetime income in today’s environment would not be so favorable, for example.”

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