Litigation heavy on minds of defined contribution execs

Defined contribution plan executives are as concerned about litigation as they are about failing to meet their participants' retirement goals, investment consultants revealed in a survey by Pacific Investment Management Co. LLC, Newport Beach, Calif.

The consultants were asked to rank their clients' most important decision-making factors. Some 64% said managing litigation risk and meeting participants' retirement goals were the first- or second-most important.

“This is troubling that sponsors are so concerned about litigation risk,” Stacy Schaus, PIMCO's executive vice president and defined contribution practice leader, said in an interview. While she had hoped the results would have been different, she said, “I'm not terribly surprised.”

“Certainly, there appears to be more discussion at conferences and in the press about 401(k) litigation and the sizable settlements for certain cases,” Ms. Schaus added. “This reality has likely raised the level of concern and, according to the consultants, is a leading factor in plan sponsor decision-making.”

The other choices asked in that survey question were managing organizational costs (39% ranked it first or second in importance); keeping pace with competitors (19%); and meeting workforce management objectives (12%).

The survey is PIMCO's ninth annual examination of the defined contribution landscape through the eyes of investment consultants. Results of the new survey are to be released on March 23; it contains responses from 58 consultants representing more than 8,500 DC plans with $3.2 trillion in retirement plan assets.

Among the survey's other findings:

• A majority of consultants said active management is “very important” or “important” in eight of 10 asset classes. The exceptions were Treasury inflation-protected securities and U.S. large-cap equity.


• Given the Securities and Exchange Commission's recent changes in money market regulations, consultants most often recommend stable value to clients contemplating a switch in capital preservation investment options. Government money market funds were second.


• In-plan retirement income options based on insurance products are, at best, modestly promoted by consultants to their defined contribution plan clients. Plus, consultants don't expect significant growth in plans' use of these options over the next three years.

Among the asset classes consultants said were very important or important to be managed actively are non-U.S. bonds (95%) and emerging markets' equity (91%).

Ms. Schaus said PIMCO also wanted to assess consultants' views of clients that offered a combination of active and passive options. When asked “which management style should dominate” among the 10 investment categories, active management was cited by an overwhelming majority — ranging from 72% to 96% — for eight asset classes. TIPS earned a slight majority (52%).

“That's a very interesting response,” said Ms. Schaus. Although there has been much written and talked about the growth of passive management, “that's not what the consultants are suggesting,” she said. (PIMCO is an active fixed-income manager with only a very small percentage of its business devoted to passively managed investments.)

The PIMCO survey also found 75% of consultants said it was “very important” and another 23% said it was important for fiduciaries to review their use of money market funds because of the rules approved last year by the SEC.

The new rules require institutional prime money market funds to apply a floating net asset value. However, the SEC said institutional prime money market funds would be exempt from the NAV requirement if investors are individuals such as defined contribution plan participants and not corporations, small businesses and endowments. Government money market funds aren't affected.

When asked what discourages clients from offering in-plan insurance-based retirement income products, 68% cited portability and 59% cited “insufficient government support,” referring to the lack of Labor Department protection, as “significant” concerns. Other significant concerns were cost (54%) and operational complexity (50%).

Among in-plan strategies “actively promoted” by consultants for lifetime income, 35% cited diversified fixed income, such as global bonds and high-yield bonds; 33%, cash management strategies, such as stable value and money market funds; and 25%, target-date funds. Only 10% said they would actively promote to clients asset allocation strategies with a lifetime income guarantee, such as a guaranteed minimum withdrawal benefit; 8% said they would actively promote deferred income annuities; and 6% said they would actively promote immediate annuities.