UBS' defined contribution group was built on a three-word motto: Improve retirement outcomes. Led by Drew Carrington, UBS Global Asset Management entered the DC arena shortly after the passage of the Pension Protection Act of 2006.
The firm was inspired by the law's endorsement of automatic solutions. Automatic enrollment and auto-escalation programs are “game-changing,” said Mr. Carrington, in terms of getting participants to where they need to be. He believes UBS is poised to do just that.
In building up its DC business, UBS partnered with record keeper Affiliated Computer Services Inc. and Genworth Financial Inc. for an annuity investment option.
Mr. Carrington has a background that helps him connect with plan executives.
Before joining UBS in 1999 as a senior fixed-income portfolio manager — eventually becoming head of defined contribution and retirement solutions — he worked closely with plan executives as a consultant.
Mr. Carrington was a principal at Mercer Investment Consulting, where he worked with public and private defined contribution and defined benefit clients, as well as foundations and endowments. He assisted plan sponsors with portfolio strategy, manager selection, investment policy and ongoing management of their investment programs.
Now is the time when some of the most important plan design changes are occurring, he said.
What are the newest investment trends you're seeing in DC right now? There are two main trends we're seeing. There's the target-date (fund) component to DC right now that is very exciting. There's movement from a lot of folks that have balanced or risk-based funds ... to target-date (options). Many plan sponsors see that as the simplest default investment option.
The second trend is the focus on the distribution phase. Plans are thinking about how participants are going to access the assets they've saved when in retirement and what the next step is. There is a lot of activity in that right now.
What are the biggest trends? Plan sponsors are looking at the second phase of automatic solutions. The first step is automatic enrollment. This is the most fascinating part of the last 10 years. Plan sponsors want to deliver better outcomes for participants. You especially hear this from corporate plan sponsors.
The second step to automatic solutions is auto-escalation. Plans are putting more emphasis on employees saving by automatically enrolling them, but auto-escalation has become a big trend, especially in light of the (Pension Protection Act). It's about building the assets, not just keeping (participants) at the initial default rate.
Are you seeing a “DB-ization” of the DC world? I like to look at it as the institutionalization of DC. There is more professional management, with customized solutions, collective funds and the like. The “DB-ification” piece, in my mind, focuses on decumulation. You have not DB'd until there is a stream of payments, until you annuitize. There has to be a holistic approach. What I mean is, you have to manage all the risks involve. Plans need to think about risk and longevity components as well.
What's your view on annuities as a DC plan investment option? Do we think income products make sense? Of course. There are five main things individuals are looking for regarding annuities: unlimited upside, limited downside, unlimited flexibility, a guaranteed paycheck for life and the assets will go to heirs, not ... the insurance company.
What are the challenges in offering annuities? They can be complicated and could lead to decision paralysis if the wrong product is chosen. You want to make this as easy as possible to explain to employees. That said, there are always going to be people that feel annuities are a gamble, in any form. There is a lot of talk about what the right solution is. Plan sponsors, consultants, providers ... we all have our opinion on what the best solution might look like.
What does UBS offer in terms of income products? We think lifetime income is crucial. What we did was partner with Genworth (Financial Inc.) that addresses all five issues we just discussed. It offers a stream of payments with flexibility. (Genworth Financial offers an annuity as a 401(k) option. Participants could elect to annuitize a portion of their assets, while still having upside potential.)
What are some of the biggest challenges plan sponsors are facing? The biggest unspoken challenge is the lack of clarity around what people should do. Issues like, if they are defaulting new employees (into a plan), what do they do about employees that are already in the plan? What do they do about company stock? One of the things we talk to prospects or clients about is how far can they go in plan design. Plan sponsors want to make sure they are fulfilling their fiduciary responsibilities. There is renewed focus on that.
Why? Because of the fee lawsuits and the activity in Washington. It's a very interesting time for DC. Plans want to make sure they are ahead of the curve and doing things right.
What are some of the new things plan sponsors are doing? We hope plan sponsors feel comfortable doing more. Some plans are doing a postcard opt-in/opt-out strategy. We're seeing more of that. It's a good thing and leads to much better outcomes for participants in the end. And that's the business we're in.
Which QDIAs do you offer? We offer target-date and balanced funds. I have to say that we attack the problem differently and we're very excited about it. What we have done is offer more than one glide-path and clients could choose the right one for them. ... We're big believers in target-date funds. Perhaps we'd offer managed accounts down the road, through a partnership, but not now.
UBS expanded its DC group last year, why? It was a big decision for us. We felt it was an opportunity to do the right thing for participants. Asking them to build a portfolio without a complete tool kit isn't really fair.
What the rise of automation has done, (is) build optimal portfolios and better outcomes for participants. And with target-date funds, plan sponsors don't have to worry about "How can I explain, say, a high-yield bond fund'? Well, you don't have to. You inverted the communication challenge. You can put asset classes in those offerings, classes that help diversify, that plan sponsors wouldn't choose on their own. Classes like emerging market debt, for instance. We all drank the Kool-Aid. We really think we can change the world and we're all fired up about it. We have a three-word motto: Improve retirement outcomes. The transition is occurring. To get 401(k) plans right is one of the best opportunities we have.
Why did UBS decide to link with a third party to offer record keeping? We saw people in the business that were doing special things. Like with our partnership with Genworth, we saw an opportunity with ACS for record keeping. We see it as an opportunity for best of breed across multiple disciplines. We have asset management expertise, but prospective clients could also come to us and get a package deal (with record keeping).
Is there too much emphasis on fee disclosure now? Of course we think plan sponsors should pay attention to the fees they pay. Disclosure at the plan sponsor level is a very good thing. At the participant level, it could be counterproductive if there's too much detail. A real danger is a race to the bottom, who could offer the cheapest plan without taking value into consideration. There's no such thing as a passive target-date fund, for instance. All the decisions: asset classes, weights, that's all active management decisions. Solving the retirement puzzle is complicated and going passive isn't necessarily the best solution.
What keeps you up at night? The last discussion we had we talked about the legislative mandate that indexing is the only acceptable route. We are concerned about that, of course. We'll see how that plays out. On the flip side, we think we could do something game-changing. I don't want to say it keeps me up at night, but it gets me up in the morning. On behalf of the team, we think there is a huge opportunity to make a difference. It's a very, very exciting time.
Contact Jenna Gottlieb at [email protected]