Capital Group Names Top Focus Areas for DC Investment Consultants

Defined contribution investment plan consultants are focused on three areas that touch on the need to solve for the decumulation of assets by workplace retirement plan participants, according to recent research from Capital Group and its client analytics director, Chris Anast.

In a survey released May 13 of 15 DC investment consultants, Anast and team found the group’s top focus areas over the next 12 months are to revise or add retirement income options, implement target-date series “deep dives” and seek ways to improve participant outcomes.

“I see all of these as somewhat related,” Anast says of the findings. “People are taking stock and trying to implement some sort of solution to solve for retirement income.”

The top area of focus, which was to “review existing or evaluate adding retirement income options,” was checked by 79% of the respondents. That represents a shift over the past 15 years to evaluate the “flood of products in the market,” says Anast.

This evaluation will not be easy. Anast notes the variety of factors in gauging and implementing retirement income options, including gaps in existing products and services, a perceived lack of portability and fees.

That complexity, he believes, led to the second area of focus being current TDF and qualified deferred alternative investment options, which was checked by 64% of those surveyed. Nearly all (98%) of consultants have a target-date series as the QDIA for participants, according to the survey, but evaluating those options may “be looking more at the decumulation phase” for the products, Anast says.

“They may be putting a little more on the recordkeepers to make sure they know how to offer [decumulation],” he says. “It’s very challenging for participants to understand it.”

To that end, a focus on participant outcomes tied for second in terms of focus areas at 64%, according to Capital itGroup.

All of the participants in the survey recommended that plan sponsor clients evaluate participant demographics to cater the investment options to their needs. Sixty-four percent advise annual review of demographics, with 36% being more flexible.

Other Focus Areas

Beyond the top three focus areas for clients, consultants next noted the SECURE 2.0 Act of 2022’s voluntary provisions (50%), recordkeeper evaluation (50%), participant engagement (36%), participant demographic analysis (36%) and cybersecurity (29%).

Overall, Capital Group found that most consultants (64%) recommend 10 to 14 investment options for DC plan clients, with mutual funds and collective investment trusts as the most common vehicles. Another 29% recommend five to nine options and 7% recommend 15 or more.

Most consultants surveyed (86%) advocate for retirement income options to be offered in a plan lineup, with half (50%) preferring both flexible and insurance-backed solutions. Anast is optimistic that retirement income solutions, including TDFs with an embedded annuity, will start to make their way into DC plans.

“The pickup rate is slow, but you are starting to see it,” he says. “So many of them are untested the market, and few people want to be the first actors.”

Some concern may come from litigation fears around trying new solutions—according to the survey, 86% of investment consultants make decisions frequently or sometimes based on legal concerns. A smaller 7% said they usually base decisions on litigation concerns, matched by 7% who never consider it.

Other worries included employer participation in offerings and recordkeepers ability to offer the solutions, according to Capital Group’s report.

Hybrid Solutions

In terms of the default TDF option for participants, the majority of consultants (64%) recommend a hybrid approach that combines both active and passively invested funds. Another 21% said they had no preference, but interestingly, no consultants chose only active.

This, according to Anast and team, shows a disconnect from plan sponsors, 21% of which in a separate survey said they implement active management.

“Most consultants highlight that active can add alpha over time,” he says. “The consultant is going to do what is best for their client—so the question is whether active management is going to cause an issue with the investment committee. If you have alignment, then they can look to an actively managed portfolio.”

Capital Group owns American Funds, which focuses on actively managed funds.

The survey also found that, despite the rise in more personalized investing, consultants don’t see customized target-date funds as the future. The vast majority (94%) of consultants use off-the-shelf target-date funds, with a smaller 64% also offering custom-date TDFs for clients. Meanwhile, another 50% of consultants see customized TDFs staying the same or even decreasing (14%) over time, with only 36% of them seeing them increase.

Anast believes that the lack of faith in more customized funds is because they may not provide enough personalization to make them worth the effort. More likely may be a continued increase of managed accounts, though only if the fees for services can prove to be worth it for participants.

“Everyone is looking at the appetite for how personalized [a plan sponsor] can get with a participant, from target-dates all the way to a full-blown managed account,” he says. “That is a question a lot of plans are turning over right now—is the customization meaningful, and if it’s not, why are you going to pay that fee?”

Capital Group’s 2023 Institutional Retirement Survey of Consultants was conducted online with 15 investment consultants from October to December 2023. The consultants had institutional assets under advisement ranging from $7 billion to $2.9 trillion.