The wisdom of setting a predetermined glidepath for the asset allocation trajectory of a target-date fund (TDF) that can span 30 or 40 years could be questioned when there are disruptions in the market. This is why some TDF providers are dedicating modest amounts of their portfolios to tactical asset allocation.
SEI Institutional had long been applying this investment technique to its defined benefit plans, says Jake Tshudy, director of defined contribution investment strategies at SEI, in Oaks, Pennsylvania. This prompted the firm five years ago to create the Dynamic Asset Allocation Fund as one of the underlying funds in its target-date fund series, Tshudy says.
The TDFs allocate up to 10% of their assets to the Dynamic Asset Allocation Fund, but like equity exposures, this allocation declines as participants approach retirement, he says. To reduce trading fees, the fund uses an options overlay.
“Glaring economic disjoints” guide the fund’s investments, Tshudy says. For example, the fund has recently gone short on the Euro and long on the U.S. dollar. “At the same time, if we decide there is a longer-term opportunity with high yield and emerging market debt, we might make those trades in the fund if we think we are going to hold those positions for a long time,” he adds.
Nonetheless, SEI believes its TDFs’ glidepath is “the most important component” driving their investments. In addition to the inclusion of the Dynamic Asset Allocation Fund, the TDFs “do have some funds that are actively managed” but the allocation is managed “from a top-down perspective,” he says.
Likewise, the TIAA-CREF Lifecycle Fund series includes a tactical asset allocation program that it has modestly added to the series over the past two years, says John Cunniff, managing director at TIAA and manager of the funds, based in New York. “We won’t deviate more than plus-five or minus-five” to the program, he says. “This will never be more than 10% of the relative tracking error. We never want the tactical allocation to overwhelm the funds and, therefore, do not have wide limits.”
Ten years ago, there were only a handful of investment managers including tactical allocation in their TDFs, Cunniff says. Today, half of the TDFs on the market include this investment strategy.
Cunniff says the reception from retirement plan advisers and sponsors has been positive. “In meetings, when we bring up the tactical element, everyone is always interested in where the markets are today, and it leads to a fair amount of conversation about it,” he says. “The reality is, the overall strategic asset allocation [of the glidepath] will be the primary contributor” to the TDF series’ investments. “This is followed by the relative performance of the underlying portfolio managers, and then the tactical element.”
Cunniff says Morningstar data has shown that TDFs with tactical allocations slightly outperform those that do not have such allocations.
The cautious approach that SEI and TIAA take to tactical allocation inclusions in their TDFs is echoed by Prudential Retirement’s Day One Mutual Funds target-date series—but unlike other TDF managers that review their allocations on a quarterly basis, Prudential typically does this annually, says Doug McIntosh, vice president, full service investments at Prudential Retirement, in Newark, New Jersey.
“Our strategic glidepath governs our thinking, with a steep risk-off 10 years before retirement,” McIntosh says. “We typically have made small tactical moves away from the glidepath—to equities, fixed income, commodities, real estate, Treasury Protected Securites—in response to long-term capital market assumptions. We are typically in the 50 to 100 basis point range on alpha and maybe 1% on volatility. That is not to say that if we saw a major market dislocation or geopolitical event, we would not permit the funds to have the ability to move more frequently.”
That said, according to McIntosh, Prudential believes it is important to remain committed to the glidepath, so that plan advisers and sponsors can remain confident that it will remain true to the “basic philosophical assumption we have staked out that the Day One Mutual Funds will be more highly invested in equities in the early years and lower in the later years, to protect investors from behavioral risk as they approach retirement. Our careful work as an industry in trimming a little bit of emerging market here and expanding holdings in fixed income will not matter if we don’t keep people invested, so the strategic glidepath really matters.”
Additionally, McIntosh continues, commitment to a glidepath is important for both advisers and sponsors: “If there is evidence of a manager who jumps around too frequently and by too much of a degree, it will make it much harder for a consultant to tell a plan sponsor that fund will still make sense 10 years from now.”
By using this site you agree to our network wide Privacy Policy.
Advisers Can Play Key Role Boosting Voluntary Benefits
Benefits consultants play a helpful role in guiding employers through decisions involving the offering of voluntary and health benefits: Why offer benefits? Who pays? How do you educate employees?
“If you want to reduce compensation and benefits spending without leaving your workforce financially vulnerable, you may need to take a closer look at the degree of choice and value provided in your benefits package,” according to Heather Garber, vice president of voluntary benefits & technology at Hub International Insurance Services Inc. in Chicago, Illinois.
“Keep in mind that your average American today probably isn’t buying insurance outside of the workplace (aside from auto/home), employees really look to employers to provide everything they will need to protect their families.” And that’s where voluntary benefits come into play, Garber says.
“Voluntary benefits are benefits that serve a variety of needs for employees, most importantly allowing employees to customize their employer-provided benefits to their unique needs,” Garber explains. “When chosen and packaged well, they are customizable benefit solutions to promote the overall well-being of employees, which can assist employers in attracting and retaining employees.” Voluntary benefits are a great way to provide employees with the benefits they want and desire with little or no cost to the company.
The ability to reduce spending for employers stems from the fact that, for the more than 20 voluntary benefits that are traditionally offered to employees, “employees pay 100 percent through payroll deduction,” says Tim Weber, national business leader, voluntary benefits at Mercer in Des Moines, Iowa.
Why Offer Voluntary Benefits
Traditional voluntary options have included short-term disability, critical illness, and life-insurance policies. But employers can help their employees build a stronger financial safety net through nontraditional voluntary benefits, such as financial planning and education, pet insurance, legal plans, and identity-theft protection.
With health-care cost pressures and regulatory complexities, Weber says that employers are increasingly moving away from traditional medical plans to offer high-deductible health plans. With such plans, the ability to purchase voluntary benefits can make the decision easier because voluntary benefits can provide supplemental coverage. Weber notes, “We see a correlation between high-deductible participation and supplemental health coverages being offered. If employees have a $2,500 deductible and the ability to cover unforeseen risks, then the adoption rate does go up.”
In addition, Garber says, “There is a highly hypercompetitive job market out there, so every company is looking for a competitive edge. We’re seeing more white-collar companies offering voluntary benefits, but they are probably using different products—for instance, a student-loan repayment plan or a high-limit critical illness plan or something similar. These companies have the same need for these plans now as the traditionally blue- or gray-collar industry did.”
Garber says, “It’s a way for employers to help ease the anxiety around the high-deductible plan with more comfort, plus employers can help employees build a stronger financial safety net through nontraditional voluntary benefits.”
Groups typically have access to richer plans than what is available on the individual market. Garber adds, “With this not only comes more competitive benefits in the plans themselves but also lower pricing and guaranteed issue underwriting. This is a major advantage to the employee.”
Benefits Offered
There are several categories of voluntary benefits today, and they are expanding to provide offerings of interest to every generation and workforce segment. According to Garber, these include benefits that are considered supplemental to major medical and core benefits (e.g., critical illness, accident, hospital indemnity, short-term disability, and life insurance); those that promote financial wellness (e.g., identity theft, legal services, purchasing programs, workplace banking and loan services, and student-loan repayment programs); and those that are geared toward enhancing employee personalization in benefit options and providing them with convenience and discounts (e.g., pet insurance, employee perks, and group auto/home insurance).
As it relates to the first category, Weber says that these “are not used to fill in an employee’s high-deductible health cost but instead to make payments for specific risks that employees can realize. There are three products that fall into that category from a health perspective: an accident plan, a critical illness plan and a hospital indemnity plan.”
Weber continues, “If employees have a high-deductible plan, they may want to buy additional coverage for specific risks that could occur. … An accident plan would pay a scheduled benefit that would help employees with whatever expenses they may have exposure to. For instance, cancer treatments would be covered under an employee’s health plan,” but ancillary expenses—such as the need to travel to the cancer center or the cost of childcare or lodging for family members—would not be. “These plans are meant to address the total risk that one could be exposed to.”
The second category relates to helping participants with financial stress or how to improve financial health. Weber says, “Often the next question I hear from employers is ‘We’ve helped employees with the risk they know about related to their core benefits, but now can you help us help our employees with their financial risks?”
Offering employees convenience and discounts is appreciated. Weber says, “We have a whole bunch of benefits that help put cash back in their pocket or give employees a chance to reduce their expenses. Our group auto/home coverage is one example.
Employers are using scale with auto insurance companies. The premiums are payroll deducted, so there is a reduction in administrative costs. We see ranges of savings from $600 to $800 a year to buy group auto coverage through an employer versus buying individually. That’s the type of benefit that is moving to the top of the list as employers are trying to help employees with their financial stress.”
In the 2017 Alight (formerly Aon Hewitt) Financial Mindset Study, survey respondents said “the extent to which I believe employers should help me obtain identity protection services” was 50%.
Ray Baumruk, employee experience partner at Alight Solutions in Chicago, was surprised that voluntary benefits services such as identity protection would rank higher, for instance, than childhood education and debt management. “When we did some qualitative analysis around this, what most people said is that identity protection connects to several things that they would want from their employer. They are worried about someone hacking into their retirement account or their paycheck, and because this is connected to their employment, the idea of having some protection overall from an identity or data standpoint makes sense. It’s connected; it’s a close link.”
Who Pays
Weber says, “In many cases with voluntary benefits, it’s essentially the employer leveraging their scale for employee-paid discounts. So, for instance, an insurance company will make a product available knowing that it’s going to be presented to a large number of employees who allow them to underwrite the risk knowing that there is potentially a pool of people buying insurance. There are also cost efficiencies because, in most cases, the employee pays for the benefit via payroll deductions. The insurance companies do not have to collect a premium from each individual. They can get the premium en masse from an employer for all of those employees.”
But Garber notes a new trend in those who pay for voluntary benefits. Traditionally, employees have paid for the premiums of these plans. However, says Garber, with the growing importance of what were traditionally voluntary benefits, for purposes of employee well-being and the reduction of employee turnover, more employers are funding the costs of these plans for their employees.
According to the 2016 Mercer National Survey of Employer-Sponsored Health, within the transportation/communication industries as an example, 74% offer voluntary benefits at no cost to employees.
Garber concurs that groups typically have access to richer plans than what is available on the individual market. With this, she says, comes not only more competitive benefits in the plans themselves but also lower pricing and guaranteed issue underwriting. This is a major advantage to the employee, in addition to the convenience of having the plans deducted from payroll.
Educating Employees
Offering the benefits isn’t enough, however, sources say. Employees need to understand the offerings so they can make informed decisions about these coverages. Clear, concise and consistent communications are key, according to Garber. She says that people learn and take in information differently, so it’s important that employers communicate information about these voluntary benefit offerings multiple times in multiple ways. “We offer our clients several solutions—including, on-site support, online materials, email blasts, videos, and flyers—and they choose the solutions that appeal best to their employee demographic and workplace culture.
Given this, we hope that employees view this information in two or three different formats [and] present it to them in a way that they are receptive to. For example, I like to read and research information online, and during our benefit open enrollment, I read all of the information posted online. My husband, however, is more receptive to reviewing this information in short bullet points or via a video overview.”
At HUB International, she continues, “we typically follow a method of providing an overview of what the plan is, some scenarios in which it might be beneficial, and then provide a claims example so employees can see how it works. From there, they have enough information to make an educated decision on [whether] it is a good fit for them and their family.”
At Mercer, Weber says leveraging the overall benefits platform is critical. With almost every employer using enrollment technology for their core benefits, “we found that adding the voluntary benefits coverage to that enrollment platform really helps the employee understand the full breadth of the coverages that are available. We’ve found that an integrated enrollment site improves the employee’s experience and increases awareness and value of voluntary benefits offerings. Consider moving HSAs [health savings accounts] and FSAs [flexible spending accounts] after medical, and follow with accident and other supplemental health policies that can be used by employees to complement their medical plan.”