Todd J. Cassler
President of Institutional Distribution
John Hancock Investments
P&I: How would you define open architecture or multi-manager portfolio construction in the context of target-date funds?
Todd J. Cassler: True multi-manager target-date funds start with a diverse group of investment options made up of several independent, unaffiliated, and specialized investment firms, which make up a significant portion of the underlying assets. A recent survey of defined contribution plan sponsors we did with P&I found that roughly 6 out of 10 participants said multi-manager means that half of the underlying fund assets must be run by managers unaffiliated with the product sponsor.
P&I: DC plan participants continue to pour contributions into target-date funds. So why aren't more plan sponsors, consultants and advisors embracing the multi-manager structure for target-date funds?
Todd J. Cassler: Today, most assets are in proprietary target-date funds, but plan-level best practices may call for an open architecture approach or a multi-manager lineup. Most plan advisors and consultants today remain committed to a multi-manager approach in recommending and selecting individual investment options. And so as you look at how plan sponsors are thinking about meeting the rising standards of retirement security and the different regulatory rules that we may be faced with, you are starting to see more plan sponsors consider a multi-manager approach — not just at the plan level — but with their target-date funds as well.
P&I: Tell us about the performance component of a multi-manager target-date fund and how plan sponsors ought to think about it.
Todd J. Cassler: For most plan sponsors and consultants, when they recommend multi-manager target-date strategies, performance is the main reason. In fact, about 7 in 10 of the respondents who use multi-manager target-date funds or strategies do so because they believe the open architecture construction offers the potential for better risk-adjusted returns. As we think about where we've been over the last 10 years, we've had a tremendous bull market, and as plan sponsors and consultants think about where we are headed, they're beginning to question whether or not they need a multi-manager approach to help meet their participant needs.
P&I: Is it more expensive for plan sponsors to go down this path of open architecture?
Todd J. Cassler: I think there is a bit of a misnomer as it relates to the cost associated with selecting a multi-manager target-date fund. If you look at the average mutual fund expense ratio for a target-date fund, it's roughly 80 basis points.* The fees on our flagship multi-manager lifetime suite run about 25 basis points lower than that average. And our multi-index suites, which make more extensive use of passive exposure, are even less expensive, about half, or 45 basis points, lower than the average target-date fund.
P&I: The spotlight has been shining increasingly brighter on retirement plan fiduciaries in recent years. How big a role does fiduciary duty play in this context?
Todd J. Cassler: It is a driving factor. As the standards of care have continued to rise over recent years, we don't think the conversation is going to end with the Department of Labor's conflict of interest rule.
One of the big areas that plan sponsors and consultants have been focused on and wrestle with is cost vs. performance. Cost is a big focus for many plan sponsors and we are starting to see more plan sponsors and consultants ask, “What kind of value are my participants getting for the fees they are paying, and is it the most appropriate investment strategy going forward?”
P&I: And how are they answering that question?
Todd J. Cassler: Plan sponsors are starting to understand the difference between cost and value. Over the last 10 years, individual investors have been rewarded for being in passive investment products. What plan sponsors and consultants are looking at now as we move into the next cycle of the market is whether or not they are best positioned being in a passive portfolio. Passive strategies have limited investments in alternative asset classes, which tend to be less correlated to the overall market. Another area of concern is the exposure to rising interest rates. More consultants and plan sponsors are thinking about those impacts within their client portfolios.
P&I: What are the challenges with using a multi-manager structure in a target-date fund?
Todd J. Cassler: I think it starts with the due diligence process. Plan sponsors have to understand whether it is going to be active, active-plus-passive or just passive. You have to evaluate the underlying structures that are being used in an individual strategy. Are they using a '40 Act product, a CIT or a separate account? What is the process of selecting the underlying managers, are they employing a 5P due diligence process (philosophy, predictability, process, people, performance), is it quantitative, is it qualitative? Is it best-in-class for certain styles that are not available internally? Are they outsourcing the allocations to managers or are they just using affiliates to meet those requirements? Are alternative investments, such as those that have low correlation to equities and fixed income, being used? There are a lot of questions to ask.
P&I: Are there other due diligence or best practice issues plan sponsors need to keep in mind?
Todd J. Cassler: The first thing is to ask what's the documented process for reviewing the style purity, risk and returns of the underlying investments. Who's held accountable for that, who's making the asset allocation decisions and what's the team associated with manager selection? Within our organization, we have an investment team of over 200 people who are dedicated to the ongoing due diligence and compliance review of the strategies that we are using in our asset allocation portfolios.
P&I: What are you hearing from current and prospective clients?
Todd J. Cassler: As an industry, a lot of effort has been put into creating accumulation solutions, as participants accumulate money for retirement. Now we are starting to see a shift where plan sponsors and consultants are talking about retirement income solutions, and how participants are going to meet their income needs in retirement. ■
*Morningstar, 2018. This is the average total expense ratio of all open-end target-date funds that are tracked by Morningstar.
The opinions expressed are those of the author as of Oct. 29, 2018, and are subject to change. No forecasts are guaranteed. This article is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index by John Hancock Funds, LLC, John Hancock Advisors, and their affiliates. Unless otherwise noted, the data cited in this article is based on a survey, jointly commissioned by Pensions & Investments and John Hancock Investments, to collect opinions on defined contribution plan designs, as of November 13, 2017. A '40 Act fund, or mutual fund, is a pooled investment vehicle offered by a registered investment company as defined in the 1940 Investment Companies Act. A CIT, or collective investment trust, is a tax-exempt, pooled investment vehicle maintained by a bank or trust company, exclusively for a 401(k) or other qualified plan. A separate account is an investment portfolio managed by a professional money manager that follows a defined strategy, of which the holdings in the portfolio are directly owned by the investor and have their own cost basis.
Diversification does not guarantee a profit or eliminate the risk of a loss. Investing involves risks, including the potential loss of principal. There is no guarantee that a fund's investment strategy will be successful. These products carry many individual risks, including some that are unique to each fund.
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