Data & Research July 15, 2016

Evolution in Use of Institutional Multi-Asset-Class Solutions

Cerulli’s latest survey of institutional investor priorities and behaviors shows lasting momentum for multi-asset-class solutions, but also some challenges for the market segment. 
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Protecting portfolios from “debilitating large-scale losses” and adjusting for the likelihood of rising interest rates remain primary goals of large-scale institutional investors, according to new research from Cerulli Associates.

The other most frequently cited goals of institutional investors, including corporate and public retirement plans, will sound familiar to professional financial advisers, including “achieving lower asset volatility,” “capturing investments with low or no correlation in returns,” and “raising risk-adjusted returns.” Cerulli finds these factors are driving greater interest and demand for “multi-asset-class solutions strategies,” both on the equity and fixed-income sides of the portfolio.

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Especially among larger defined contribution (DC) plans, there is an ongoing push into this domain via custom target-date funds (TDFs), managed volatility overlay strategies, and a variety of other “sophisticated volatility or income-targeting and absolute return investments,” Cerulli finds.  Related to this is steady interest in outsourced chief-investment officer mandates.

“We believe institutional custom solutions represent a substantial and growing market for asset managers, investment consultants, and other financial firms,” Cerulli explains. “Assets in these categories stood at $1.1 trillion at year-end 2015, up from $506 billion in 2010. Assets are expected to grow 34.5% to $1.7 trillion by 2020, reflecting somewhat uneven near-term growth, but accelerating more fully in the medium to long term.”

Asset managers favor this growth, in fact, because “the focus on cost prevalent in the broader asset management industry is largely not present in institutional custom solutions … When it comes to complex custom solutions mandates, however, there is an understanding that managers will be expected to provide more technical and in-depth services beyond basic investment management.”

NEXT: The evolving scope of service 

Cerulli finds that the number of custom institutional multi-asset-class solutions added over the past year “has risen exponentially, even if growth of client assets under management is more uneven as of late.”

In terms of clients’ goals in utilizing these approaches, approximately 60% of strategies “continue to be judged on performance against a traditional market benchmark, as opposed to an objective such as real returns or volatility targets.”

Other findings suggest the present environment for pension de-risking represents “a pause in the long-term future growth of liability-driven investing (LDI) client assets.” As such, nearly half (49%) of LDI managers and others are “managing assets for corporate defined benefit (DB) plans that have frozen accruals in some form,” Cerulli explains. “Nearly two-thirds (63.5%) of corporate DB clients of LDI managers have a de-risking glide path in place. However, most plans are not hitting their de-risking glide path triggers as interest rates have remained low and funded status has stagnated, or, in some cases, deteriorated.”

With so much market complexity, Cerulli says it only makes sense that custom solutions mandates “tend to be complex and clients expect a greater amount of interaction with a manager than in traditional single-asset-class assignments.” A majority (68.4%) of firms overseeing these mandates report having a dedicated team to work with custom solutions clients.

“The most-cited roles serving institutional custom solutions mandates are portfolio manager and investment specialist (89% and 83%, respectively),” Cerulli concludes.

Information on obtaining Cerulli Associates research, including “U.S. Institutional Custom Solutions 2016: The Rising Demand for Outcome-Oriented Client Strategies,” is here. 

Data & Research July 14, 2016

Commission Makes Recommendations to Improve Retirement Security

Among the recommendations is to establish a nationwide minimum-coverage standard to pre-empt the patchwork of state-by-state regulation that is already developing.
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The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings issued a report of a comprehensive package of bipartisan proposals to address key challenges to retirement security.

To improve access to workplace retirement savings plans, the commission recommends the creation of a new, streamlined option called Retirement Security Plans that would allow small employers to transfer most responsibilities for operating a retirement savings plan to a third-party expert, while still maintaining strong employee protections. The commission also suggested enhancing the existing myRA program to provide a base of coverage for those workers, such as part-time, seasonal, and low-earning workers, who are least likely to be offered a retirement savings plan.

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The report notes that other workers have access to retirement savings plans but do not contribute. It proposes an alternative to nondiscrimination testing along with new tax incentives to encourage employers to adopt automatic enrollment and escalate their employees’ contributions over time.

Once these reforms are in place, the commission recommends establishing a nationwide minimum-coverage standard to pre-empt the patchwork of state-by-state regulation that is already developing. Beginning in 2020, employers with 50 or more employees that do not already offer a retirement plan that meets certain minimal thresholds would be required to automatically enroll employees into a new Retirement Security Plan or myRA.

The report notes a variety of additional reforms that could support greater access to retirement savings plans and improve the experience of plan participants, such as encouraging lower-earning individuals to save for retirement by improving the existing Saver’s Credit for younger workers and by exempting some retirement savings from asset tests to qualify individuals for certain federal and state assistance programs.

The commission also recommends the creation of a Retirement Security Clearinghouse to help Americans consolidate their retirement savings, steps to limit over-exposure to company stock, and modest adjustments to retirement tax expenditures. In addition, it recommends the creation of Lifetime Income Plans—a new, more-sustainable retirement-plan design that could be adopted on a voluntary basis. This new plan design would blend the strengths of defined benefit and defined contribution plans by incorporating elements of both approaches.

NEXT: Preventing leakage and reducing the risk of outliving savings

To prevent leakage from retirement plans, the commission proposes to ease the process for transferring savings from plan to plan, because many pre-retirement withdrawals occur upon job separation. In addition, early-withdrawal rules and penalties for workplace plans and individual retirement accounts (IRAs) should be harmonized by raising IRA standards.

To reduce the risk of outliving savings, the commission recommends that plan sponsors integrate sophisticated but easy-to-use lifetime-income features within retirement savings plans. For example, the report says, it should be easy for plan participants to purchase a guaranteed lifetime-income product in automatic installments.

Plan sponsors could establish a default lifetime-income option or offer an active-choice framework, in which participants are asked to choose options from a customized menu. In-plan tools could also help participants make an informed decision about when to claim Social Security benefits and then to schedule withdrawals from their retirement plan to facilitate later claiming of Social Security benefits. The commission says it believes employers need safe harbors to limit their legal risk as they offer these features and attempt to educate workers about longevity risk and lifetime income.

Additionally, the commission recommends clearing barriers to offering a wider array of choices for lifetime income in both retirement savings and pension plans. In defined contribution plans, participants age 55 and older should be allowed to use their retirement savings to purchase annuities that begin payments later in life, the report says. Workers with defined benefit pensions should be able to receive part of their benefit as a lump sum and the rest as monthly income for life, rather than the all-or-nothing choice most have today. Also, to encourage participants to work longer and provide more consistent work incentives, the commission recommends allowing employer-sponsored retirement plans to align plan retirement ages with Social Security.

The report also offers proposals to facilitate the use of home equity for retirement consumption, improve financial capability among all Americans, and strengthen Social Security’s finances and modernize the program.

The report is here.

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