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Defined Contribution

Reviewing target-date funds is now top priority

Richard Fulford called the change ‘pretty significant’ and said it shows plan sponsors are paying attention to the decumulation phase.

When it comes to defined contribution plan design and management, money isn't everything, says a new survey of DC consultants by Pacific Investment Management Co. LLC.

Costs and fees rank high among the concerns of the consultants and their clients, but other issues such as target-date fund glidepaths have emerged as topping to-do lists, especially in areas that focus on decumulation, said the annual survey, released April 15.

"It is fair to ask if we have seen the high-water mark related to the focus on fees — with plan sponsors now having appropriate governance mechanisms in place," said the report, describing the comments of 32 consulting and advisory firms. Together, the firms serve more than 3,750 DC clients with ag- gregate assets of more than $4 trillion.

"Consultants indicate client focus has shifted, with reviews of the target-date fund now the highest priority, followed by evaluation of plan cost and simplification of investment menus," the report said.

This "pretty significant shift in focus" reflects sponsors paying greater attention to defined contribution plans' efforts to help participants manage spending down — rather than accumulating — retirement assets, said Richard Fulford, the Newport Beach, Calif.-based PIMCO executive vice president and head of U.S. defined contribution.

For example, one question asked: What are the most important factors in evaluating and selecting investment default strategies? Glidepath structure placed first (82% of responses), followed by fees (56%) and probability of meeting retirement income objectives (47%). Multiple answers were permitted.

In the previous survey, fees finished first (83%), followed by glidepath structure (82%) and probability of meeting retirement income objectives (65%).

'Focus on retirees'

"It all comes back to the focus on retirees," Mr. Fulford said, adding that a lot of the work has already been done in fee reductions.

He pointed to another survey result to augment his comments. When consultants were asked what were their clients' top three priorities, reviewing target-date funds was the clear leader (63%), followed by evaluating investment fees (44%) and evaluating administration fees (28%). The question offered 21 choices.

In the previous year's survey, the top answer was evaluating investment fees (63%), evaluating how costs are paid (59%), reviewing target-date funds (57%) and reviewing administrative fees (57%).

"There's greater scrutiny (among sponsors) as to whether their target-date funds are appropriate for retirees from a risk perspective," Mr. Fulford said. "Do they serve the needs of retirees?"

Mr. Fulford also noted that DC consultants reported a greater interest among clients in encouraging departing participants to keep their retirement accounts in their plans.

Consultants said 24% of clients "actively seek" to retain those assets, compared with 19% in the previous survey. Consultants said 38% "prefer" participants keep their assets in the plan but they don't actively encourage them. In the previous survey, 29% offered this response.

Based on anecdotal information, Mr. Fulford said the desire for asset retention "is even higher when you ask sponsors themselves."

Plans encourage asset retention to improve their negotiating power with providers for lower-cost investments. The reason for asset retention "is almost universal," Mr. Fulford said. "It's scale."

In the survey, the consultants told PIMCO that only 6% of clients preferred participants to take their accounts out of their plans vs. 16% in the previous survey. Thirty-two percent of clients were indifferent, compared with 16% in the previous survey.

To further encourage retirees' asset retention in the plan, consultants told PIMCO that 84% of clients offer some form of distribution flexibility, such as partial and installment payments.

Offering such flexibility combats the all-or-nothing approach that plans offered their retirees in the past, Mr. Fulford said. The survey also found that 41% of sponsors offer retirement education or retirement tools to help retirees manage their accounts. And 38% have offered retiree-focused investment options, also known in industry-speak as a retirement tier.

Mr. Fulford said the retirement tier concept isn't a one-size-fits-all approach.

For example, the PIMCO survey asked consultants which investment options they would most likely recommend to clients as retirement income options. Among a dozen choices, at-retirement target-date funds and at-retirement target-date funds with a distribution/payout focus were the most recommended. A multiasset payout strategy, managed accounts and capital preservation options — such as stable value, money market funds and short-duration bonds — also were popular.

Managed accounts scrutiny

Ironically, consultants expressed skepticism about managed accounts. In a series of survey questions:

Only 6% "strongly agreed" that participants provide the necessary information so that managed accounts could provide a personalized assessment, 31% said they somewhat agreed. Forty-seven percent strongly or somewhat disagreed.

Six percent strongly agreed that the cost of managed accounts was justified based on their more personalized portfolios and anticipated risk-adjusted performance, while 25% said they somewhat agreed. Fifty-three percent strongly or somewhat disagreed.

Six percent strongly agreed that the risk-adjusted performance of managed accounts outperforms target-date funds, although 66% agreed somewhat. Twenty-nine percent strongly or somewhat disagreed.

"Managed accounts require that participants engage," Mr. Fulford said. "If they don't engage, it's a major hurdle."