Half of the consultants serving defined contribution plans representing more than $1.5 trillion in assets expect clients to reduce usage of stable value options “over the next several years,” according to a survey by Pacific Investment Management Co. LLC.
The survey said 43% of consultants predicted a “slight decline” in stable value usage and 7% forecast a “notable decline” in usage, while only 11% forecast a “moderate increase” in the use of stable value funds. Thirty-nine percent predicted no change, according to the fifth annual survey conducted by PIMCO, Newport Beach, Calif., which was issued March 7.
The major reasons why consultants believe sponsors may drop stable value options were restrictive agreements imposed by wrap providers (71% of respondents), the lack of wrap capacity in the marketplace (54%) and wrap fees (36%), Stacy Schaus, senior vice president and head of the PIMCO's defined contribution practice, said in an interview. Respondents could cite more than one reason in the survey.
This is the first time PIMCO asked consultants about stable value options, Ms. Schaus said. The latest survey, conducted by e-mail in December and January, featured responses from 29 consulting firms that have more than 2,350 clients.
According to the survey, 82% of consultants said the most common action that plan sponsors should take with their capital preservation fund is to “evaluate the underlying investment management of the stable value fund.” However, 50% of consultants said their clients are “happy with their current capital preservation plan option,” according to a summary of the survey results.
Consultants are taking an increasingly positive view that clients will add a retirement income option to their DC plans in the next two years. Eighty-five percent said it was likely or somewhat likely that clients would add this option vs. 15% that said it was unlikely, according to the survey. The percentage was 80%-20%, respectively, in last year's survey and 78%-22% in 2009.
“Companies are interested, but they're still waiting for more guidance,” said Ms. Schaus, referring to Labor and Treasury departments working on proposed regulations for such investment options. “They don't expect rapid adoption until there's word from Washington, D.C.”
Consultants say cost, uncertainty over government support and guidance, concerns about fiduciary responsibilities, and fears of default risk among insurance companies that provide annuity-based options are among the biggest reasons clients balk on offering lifetime income options, Ms. Schaus said.
The consultants believe the most likely lifetime income products to be embraced by sponsors are “target-date mutual funds with a deferred fixed-income annuity, managed payout mutual funds with a longevity insurance annuity and immediate fixed-income annuities,” according to the summary.
When asked what would bring the most value as an added asset class within a core investment lineup or as an addition to asset-allocation strategy, consultants cited Treasury inflation-protected securities (71% of respondents), emerging markets equities (57%) and commodities (46%) as their top choices, the survey said. Consultants could pick more than one.
Among the consultant survey's other findings:
• Fifty-four percent said plan sponsors should seek lower-cost investments, such as collective investment trusts “due to concerns about recent litigation, or risk in general.”
• Fifty percent said revenue sharing should be eliminated while 46% said sponsors should renegotiate fee contracts with their providers.
• Fifty-nine percent said exchange-traded funds “have no place in DC plans,” except in a self-directed brokerage window, “as they see no advantage to ETFs at this time.” Seven percent said ETFs can add value to a DC plan lineup, while the rest of the respondents said ETFs “may have a place in DC plans in the future depending on the products (that are) developed.”
• Sixty-four percent expect investment returns to be lower in the future, an economic environment that Ms. Schaus called the “new normal.”
• Fifty-four percent predicted higher volatility in the future, while 39% forecast similar volatility and 7% didn't provide an outlook.