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April 09, 2012 01:00 AM

PIMCO survey: Target-date funds good for small plans, too

Rob Kozlowski
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    Custom target-date funds are appropriate for more than just giant defined contribution plans, with more than 40% of consultants saying these strategies can work for sponsors with less than $200 million in assets.

    That's one conclusion from the latest annual survey by Pacific Investment Management Co. LLC, Newport Beach, Calif., which said that 17 of 39 large DC consultants, or 43.6%, believe it “makes sense” for plans with less than $200 million in assets to explore the use of custom target-date funds.

    “The (plan) size has gone down over time, and more record keepers have been able to establish open architecture,” which gives sponsors more choices, Stacy Schaus, executive vice president and PIMCO's defined contribution practice leader, said in an interview.

    The survey also noted that five consultants, or 12.8%, said custom target-date funds were appropriate for plans with assets from $200 million to $500 million. Thus, more than half of the consultants say customized target-date funds could work for plans with less than $500 million.

    “The key word for sponsors (contemplating customized target-date funds) is control,” Ms. Schaus said. “Control over the glidepath. Control over fees. Control over the hiring and firing of investment managers.”

    The latest survey featured e-mailed responses from executives at DC consulting firms which collectively serve more than 3,600 clients with assets exceeding $1.8 trillion.

    When asked why sponsors are reluctant to create a customized target-date fund series, the most frequently cited “significant concerns” were difficulty in setting it up (15 responses), fear of liability (14), insufficient asset size (11), lack of staff (11) and lack of perceived fee advantage (10), according to a report describing the survey results.

    Seventy-one percent of consultants said there was insufficient differentiation or choice among off-the-shelf target-date funds “to meet unique plan demographics needs,” according to the report, which was issued Monday.

    Only 21% said there was “plenty of choice” in the marketplace, the report added, while 8% said there were enough choices.

    An increasing percentage of consultants believe tactical asset allocation should play a role in glidepath management of target-date funds. In the latest survey, 65% said tactical asset allocation's importance ranged from critical to somewhat important, compared to 55% last year, the report said.

    Also, 35% said tactical asset allocation was not important, “as it may hurt performance” compared to 44% last year, the report said. “There are more believers in tactical asset allocation,” said Ms. Schaus, whose firm manages more than $250 million in off-the-shelf target-date funds.

    Given the typical retirement age of 65, the report noted that a combined 35% of consultants believe typical glidepaths are “somewhat inappropriate,” saying that “many are “too aggressive,” or are “highly inappropriate,” saying that “most are far too aggressive.”

    The report said 62% of consultants believe the glidepaths are “somewhat appropriate” because “many are on target,” while only 3% say glidepaths are “highly appropriate” because “most are on target.” The results for the glidepath analysis in 2012 “are consistent with 2011,” the report said.

    More than half of the consultants said the allocation to “risk assets” — equities, for example — should exceed 30% for participants at the traditional retirement age of 65, the report said. Thirty-five percent said the risk asset range should be 30% to 40%, while 19% favored 40% to 50%, and 3% supported a risk asset allocation of more than 50%.

    Among other findings in the PIMCO survey, the report said:



    • The most popular recommendations for improving a core fund lineup or asset allocation are emerging markets equity (67% of respondents), commodities (60%) and absolute-return strategies (60%). In the previous two surveys, Treasury-inflation protected securities, emerging markets equity and commodities were the top three choices. In the current survey, TIPS placed fifth with 43%. Ms Schaus said the TIPS result reflects the fact that many plans already have added this asset class.

    • The best way to gain exposure to emerging markets equity in a DC plan would be through a global asset allocation strategy such as a target-date fund, according to 71% of consultants. Sixty-eight percent said this could be achieved through a broad non-U.S. global strategy added to the plan's core investment lineup, and 50% suggested a stand-alone emerging markets equity fund added to the core lineup.

    • Half of the consultants expect capital market returns to be lower in the future, less than the 64% in last year's survey. But 71% of consultants in the latest survey predicted higher capital market volatility in the future compared to 54% in the previous survey.
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