Interest rises in keeping retiree assets in-plan

Defined contribution plan sponsors have become more interested in encouraging participants to keep assets in their plans after retirement, a survey of DC consultants by the Pacific Investment Management Co. LLC revealed.

The reasons include the traditional desire to have more assets in a plan so sponsors have better bargaining power to secure lower prices with vendors as well as a growing effort to offer retirement income products and services, said Rene Martel, head of retirement and a managing director in Newport Beach, Calif.

"If you want to retain assets, offer them something," Mr. Martel said, noting that many respondents' clients already provide or plan to provide an assortment of inducements such as retirement income education tools, flexible distribution policies and personalized advice.

The findings, released April 19, are part of the 15th annual PIMCO survey covering institutional DC consultants representing clients with a total of $5.5 trillion in retirement assets. The survey was conducted in January and February. It contains responses from 29 consulting firms with DC assets under advisement of $10 billion or more. Twenty-four percent of the consultants estimated that their clients had median DC assets of more than $500 million, and 73% estimated the clients had median DC assets of more than $100 million.

PIMCO also polled smaller-plan consultants and advisers, which PIMCO calls aggregators, whose clients had total assets of $1.2 trillion. This survey contained responses from 11 firms with DC assets under advisement of $10 billion or more. Ninety percent of their clients estimated that their plans had median DC assets of $100 million or less.

The survey of large-plan consultants — PIMCO calls them institutional consultants — found that 36% of respondents' clients last year actively sought to retain retired participants' assets and 38% said they preferred to retain these assets but didn't actively encourage it. By contrast, in 2014, the respective percentages were 14% and 32%.

There was a sharp drop among respondents' clients preferring that retiree assets leave the plan — 7% last year vs. 17% in 2014. Nineteen percent of clients were indifferent last year vs. 38% in 2014.

When asked what a majority of their clients are doing to retain assets in their plans, 74% of the institutional consultants said clients already offer retirement education tools and 22% plan to offer them. Examples could include information on Social Security, employer-paid pre-retirement counseling via a financial advisory firm, lifetime-income projections data and enhanced discussions of lifetime income options in an employee's separation package, said Joseph Healy, a senior vice president, account manager and specialist in the defined contribution practice in PIMCO's New York office.

The survey also reported that 54% of consultants said a majority of clients provide distribution flexibility (such as partial or installment payments) while 29% plan to do so. In addition, 46% said a majority of clients offer personalized advice, and another 21% said clients plan to do so.

Forty-three percent said clients offer managed accounts and 21% said clients plan to offer this option.

These were the most popular responses among nine choices for asset retention for which multiple responses were allowed. The least popular choices were the offering out-of-plan annuity/insurance choices and the offering of in-plan insurance/annuity choices. In each category, 4% of respondents said a majority of clients had implemented these options while 11% were planning to do so.

The survey also polled institutional consultants and aggregators about their future roles in the pooled employer plan market. Twenty-seven percent of aggregators said they plan to offer PEPs this year vs. 11% of institutional consultants. The former (27% of respondents) and latter (30%) said they would advise or consult with PEPs. Half of the institutional consultants said they will observe the market this year vs. none of the aggregators.

When asked what plans would be most attracted to joining a PEP, the survey, which combined comments from both groups for this question, reported the greatest interest — PIMCO calls it significant migration — would be among plans with $5 million in assets or less. However, the consultants and advisers also predicted strong results for "modest migration" to PEPs for plans as large as $50 million in DC assets.

In-plan retirement-income options such as annuities or guaranteed minimum withdrawal benefits still face hurdles, PIMCO reported. Asked what percentage of clients would offer these options in the next 24 months, institutional consultants said only an average of 9% would do so.

"The SECURE Act helps, but there is still a lot to be learned," Mr. Martel said, referring to the Setting Every Community Up for Retirement Enhancement Act, which was enacted in December 2019. It provides a fiduciary safe harbor for DC plans that offer in-plan annuities if an annuity provider were to fail.

"There is uncertainty about what products will meet participants' demands," he said.

When asked the best way to deliver a retirement-income solution, the top choice among 11 options was a target-date fund, cited by 43% of consultants.

There was a three-way tie for second (36% of consultants): target-date funds with embedded income guarantees, income-focused fixed-income investments and target date-funds with a regular level payout — a predetermined payment for a specific period of time.

When asked what their clients' top five priorities will be this year, evaluating retirement income (57% of responses) ranked fourth behind reviewing target-date funds (68%), evaluating investment fees (64%) and evaluating administrative fees (61%).

PIMCO executives decided to take this question a step further by asking consultants what was the single priority for so-called "leading edge" clients, which Mr. Martel described as sponsors that are early adopters of new products or services.

For that group, the top priority, at 41% of responses, was evaluating retirement income. The next largest response was setting up a retirement tier, cited by 19% of respondents.

Describing a retirement tier, PIMCO researchers used a definition by Defined Contribution Institutional Investment Association as a group of products, tools and services that enable sponsors to go beyond asset accumulation to help participants nearing, at or in retirement.

Despite consultants' wishes, however, their clients haven't yet embraced the retirement tier.

On average, only 6% of their clients offer a retirement tier while 1% is implementing one. Sixty-three percent said their clients on average don't plan to offer or haven't considered offering a retirement tier. However, 30% are planning to offer or evaluate a retirement tier. The survey did not ask for the sponsor's timetable for doing so.

Among other survey highlights, PIMCO found that it doesn't take much in terms of lower fees for consultants to recommend a collective investment trust vs. a mutual fund, assuming performance is comparable.

For 36% of consultants, 1 basis point was the tiebreaker; for another 39%, 3 basis points or less was enough to recommend a CIT.

"The numbers draw your attention," Mr. Martel said. "It is perceived by sponsors as sufficient. It was kind of surprising that 1 basis point could make a difference."

When asked their top three reasons for recommending a CIT over a mutual fund, 96% of consultants cited "optimal pricing," 54% said they would only recommend CITs to institutional clients and 39% referenced flexibility in investments and plan design among eight choices. Multiple answers were allowed. Only 4% said they don't recommend CITs over mutual funds.