Stacy L. Schaus has come full circle.
Ms. Schaus, a senior vice president at Pacific Investment Management Co. LLC, Newport Beach, Calif., and head of the firm's defined contribution practice, wanted to be a journalist when she got out of college but instead landed a job in the research department at Merrill Lynch. A year into it, with journalism jobs few and far between, Ms. Schaus stuck with Merrill.
After several years with Merrill, many more at Hewitt Associates and the last four at PIMCO, she's published a book, “Designing Successful Target-Date Strategies for Defined Contribution Plans.” And true to her journalistic aspirations, the book, published last month by Wiley John Wiley & Sons Inc., is chock-full of interviews with more than 55 experts including consultants, plan executives, academics, financial planners, lawyers and others.
The book might be the culmination of Ms. Schaus' nearly 20 years in the defined contribution business — but she's nowhere near done yet. With PIMCO's defined contribution assets having more than doubled during the past four years, “I believe we're well positioned for the future both in our core strategies as well as diversifying assets and developments in retirement income,” she said. “Today, I'm able to tap into the many years of experience, using not only writing but also strategic development, economics and marketing. What I find most satisfying is focusing my efforts on improving the lives of others by developing better retirement programs.”
Beyond the walls of PIMCO, Ms. Schaus has become a voice for the industry as the defined contribution market has moved from a “keep it simple, just get them to participate” mode to a “what's the optimal design to meet participant income needs at retirement” mode, she said. Just last month, she and other industry heavyweights launched the Defined Contribution Institutional Investment Association. She serves as the group's chairwoman.
What's the big trend in DC plans? With the increase in target-date fund assets, there's more of a concern about how those assets are managed and this is driving a trend toward open architecture, where a plan sponsor has more control over every one of the underlying investments.
How do plan executives measure the success of their DC plans? If we look back even five years and asked the majority of plan sponsors “how would you measure the success of your plan,” they would probably say (they do so) by the participation rates or perhaps even contribution rates. While participant and contribution rates are very important, now there's more of a shift to outcomes — will the plan reach its retirement income goal that's set. Now you need to measure whether plans will make it or not. That has been a tremendous change.
How did the global financial crisis, recession, etc. affect defined contribution plans? The global financial crisis placed a tremendous amount of scrutiny on how defined contribution plans are managed. I think as a result of the losses that people experienced — through 2008 they lost about 25% of their defined contribution account value — it raised the level of scrutiny that plan sponsors are putting on their DC plans. It also raised scrutiny and questions from Washington on whether these plans are being appropriately managed, particularly for those who are approaching and entering retirement. As a result, I do think you're going to have more of a focus on institutional investment management approaches that can bring down fees, bring down risk. More plan sponsors are looking at how much risk do we really need to put in front of our participants and can we bring that risk level down?
So then how are defined contribution plan executives approaching risk management? When we look at how risk has been managed in defined contribution plans, historically it's been managed by offering more investment options and often that's meant filling the equity style boxes with different types of equity funds, whether it's small cap, midcap, large cap. Perhaps some international. I think now there's a bit of a shift to looking — instead of at the equity asset allocation or the asset classes — at the risks underneath. The risk factors that are going into the plan. With that there's more scrutiny on how you bring in true diversification ... instead of simply having a lineup of pure equity strategies, looking at having more strategies that add diversification, whether it be TIPS for inflation protection, real estate, commodities or other types of strategies.
The big movement among DC plans is toward target-date strategies. Why are more companies setting up custom target-date strategies? The Pension Protection Act (of 2006) helped fuel that direction. I think what we've learned is with the size of assets going into target dates, plan sponsors need more control and oversight of what is actually within those vehicles. They want the ability to control the lineup, tapping into best-in-class investment managers. They want control over fees, oftentimes being able to use the same institutional investment managers that are in their defined benefit plans and being able to leverage those already in their core option. And they also want transparency from a fiduciary standpoint so they know what's going on at each level within the target-date strategies.
What role is Washington playing in this evolution? Washington does care quite a bit about target-date strategies. I think they care quite a bit about the risks that retirees are facing and making sure American workers are able to retire with sufficient income and so, to that end, being able to have strategies that a plan sponsor, as a fiduciary, can oversee and have full transparency of, is something that we believe Washington would smile upon.
There's been a lot of discussion about whether target-date funds should be managed to or through retirement. What risk levels are appropriate, and how do plan sponsors address that? The “to vs. through” debate just came about over the last year or so, and it came out of a discussion of what is appropriate for someone coming up to age 65 and going into retirement. What I find interesting is different folks in the market — different consultants, for instance — may define “to vs. through” in different ways. “To” may be defined as when you come to age 65, you go to zero exposure to any risky assets, for instance, equities. In other cases, folks may think “to” is going to, for example, 30% equity and it continues indefinitely. I think what's important is, based on the plan and based on what other assets an individual may have going into retirement, that the appropriate risk level be achieved by the time they reach 65.
What may be on the horizon in the areas of advice and retirement income solutions? I'm very hopeful that both advice and retirement income solutions evolve rapidly. If you look traditionally at what we've done for participants in defined contribution plans — advice has been about getting them into their plan and allocating their assets and pretty much stops there. They need more help understanding how much savings they'll need to meet retirement income goals, they need to understand how their savings will translate into monthly income, they need to understand risk and they need broader help as well. It can't just be on the investment side. I hope we see broader advice and broader financial planning, especially in companies where the employees very much trust, for the most part, their employers. On the retirement income side, there's a clear recognition that people need help with longevity risk management.