Craig Stapleton Senior Vice President and Head of Quantitative and ALM Strategies
Kent Peterson Second Vice President and Chief Financial Officer/Actuary
Cost and choice are two important considerations for any retirement plan, from defined benefit pension plans to defined contribution plans. However, a plan's size can significantly affect both cost and choice.
For defined benefit, or DB, plans, the issue is economic and becomes acute for plans that are derisking. On the defined contribution, or DC, side, the challenges are freedom of choice in the investment options plan sponsors can offer their participants and the plan costs buried in investment expenses or a reduced stable value return.
Securian Financial considers large plans as those with more than $500 million in assets, mid-size plans as those with $50 million to $500 million and small plans as those with $50 million in assets or less.* The size of a DB plan can determine the breadth of flexibility — or lack thereof — and options that can put the plan's assets to best use.
“While many DB plans pursue liability-driven investment strategies, their approach and how they manage it depend on the plan size,” said Craig Stapleton, Securian Asset Management's senior vice president and head of quantitative and ALM strategies. “LDI targets a reduction in funded status volatility over time, which is due to a mismatch between the assets and liabilities.”
There are target-risk profiles that derisk over time, depending upon the funded status level.
“As a plan gets closer to fully funded, 100% of assets may be in fixed income,” Stapleton said. “But if it's very underfunded, there may be 50% in equities, with the hope to grow assets and migrate toward a fully funded immunized portfolio.”
Small DB plans: Limited flexibility
With little or no economic clout, small DB plans often get less attention and stuck in less-than-ideal structures. For example, a $50 million plan is likely in a 50/50, 60/40 or 70/30 balanced-fund portfolio.
“It could be just exchange-traded funds, and the duration within the fixed-income portion may only be five years,” Stapleton said. “Whereas the liability may have a duration from nine to 20 years. That asset allocation is not based on a thoughtful approach to fully fund the plan and derisk over time.”
Interest rate uncertainty adds another layer of risk, especially if the plan is not matching from an asset-to-liability perspective.
“You have a lot of risk embedded in that mismatch,” Stapleton said. “If interest rates move against you, you'll have a big adverse economic impact to your funded status.”
And smaller plans don't have the capability to reduce that risk, which can be costly.
“Plan sponsors may not even be aware of the magnitude,” he noted. “Whether it be the equity risk they're holding or the interest rate mismatch. An education process is needed to show, 'Here's your economic risk and exposure, and here's how we can help mitigate it.'”
Securian Financial offers customized LDI solutions for smaller plans, and looks at statistics within a plan's pool of participants, such as retirees versus active workers.
“This allows us to create a portfolio that effectively matches and immunizes the cash flow profile,” Stapleton said. “We also offer an active-derisking glidepath mechanism that actively monitors a plan's funded status.”
When the funded status increases, or targeted interest rate levels are breached, the firm can programmatically derisk the plan's asset-liability profile.
“As an insurance company, we can provide general account stable value solutions,” he added. “If plan sponsors with small plans don't want to take any interest rate risk and want a fixed-crediting mechanism, we can provide that.”
Small DC plans: An underserved market
For DC plans, the issue is less about the economics and more about flexibility and fiduciary risks for plan sponsors.
“The essence of the question has always been the underserved nature of small plans,” said Kent Peterson, second vice president and chief financial officer/actuary of Securian Financial's retirement solutions business. “These plans lack scale and have limited bargaining power. Ultimately, they don't come from a position of having much control.”
Large DC plans have the scale to offer customized investment products and control, and can be more effective for fiduciary-risk management, transparency and plan performance.
“The typical target-date fund is a one-size-fits-all solution,” Peterson said. “Every plan gets the same target-date fund from that particular fund family, and every participant of particular age or retirement age gets the same investment mix. That's limiting and doesn't provide the best solutions to meet the particular needs of the plan sponsors or their participants.”
The challenge is to bring large-plan retirement solutions to smaller plan sponsors.
“How do you make sure they're not just left with a prepackaged plan that doesn't provide the best outcomes for participants?” Peterson said.
At Securian Financial, the collective scale of its clients and technology give smaller plans the option to customize their qualified default investment alternative to their plan, while avoiding the conflicts of interest and hidden fees of proprietary solutions.
“When you combine a lot of small plans, you create the scale the large market has,” Peterson added. “You can give choice and reduce expenses, benefiting both plan sponsors and participants.”
It's outcomes that matter
Focused on outcome-oriented results, Securian Financial has a long-term perspective regarding its DB clients.
“We help them manage their plan better,” Stapleton said. “They may want to reduce their funded status volatility over time, decrease their interest rate exposure or become more fully funded. Whatever their goal, we're monitoring that and reporting back. We're not fixated on monthly returns.”
That customization also works for DC clients.
“Many proprietary options inside target-date funds don't have track records typically expected of retirement investment options,” Peterson said. “We work to give plan sponsors and their participants a flexible, transparent solution that's nonconflicted.”
Plan sponsors can build portfolios from their plan's core investment options or create unitized model portfolio solutions with noncore investments. In plans using Securian Financial's record-keeping services, more than 60% of participants invest 100% in diversified asset allocation portfolios, Peterson said.**
“Model portfolios are successful because they're extremely transparent to plan sponsors and participants,” Peterson noted. “When you feel diversified, you sleep better at night, even when markets are turbulent. Avoiding emotional investment decisions is a key driver of success.”■
*,** Securian Financial as of Dec. 31, 2018.
Unitized model portfolios are created and maintained by a retirement plan's Registered Investment Advisor. The assets for each unitized model portfolio are held in custodial accounts at Mid Atlantic Trust Company and not in a group variable annuity issued by Minnesota Life Insurance Company.
Model portfolios are populated by the plan fiduciary using the plan's available investment options. Each portfolio is diversified with varying quantities of stock and fixed income investment options based on generally accepted investment principles and historic volatility of the asset classes. These portfolios are not guaranteed and may increase or decrease in value.
These materials are for informational and educational purposes only and are not designed, or intended, to be applicable to any person's individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. Securian Financial Group, and its affiliates, have a financial interest in the sale of their products. Opinions expressed herein are those of Securian Financial Group, Inc. and its affiliates only, and only as of the date indicated.
Securian Financial's qualified retirement plan products are offered through a group variable annuity contract issued by Minnesota Life Insurance Company.
Securian Financial is the marketing name for Securian Financial Group, Inc. and its affiliates. Minnesota Life Insurance Company is an affiliate of Securian Financial Group, Inc. Securian Asset Management, Inc. is a subsidiary of Securian Financial Group, Inc.
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