The Markets March 8, 2012

Participants Look to Plan Sponsors for Inflation Guidance

Inflation is a major concern for plan sponsors and their participants when planning retirement investment portfolios. 
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During a webcast, Fredrik Axsater, managing director of global defined contribution at State Street Global Advisors (SSgA), and Brent Bell, vice president of the SSgA Multi Asset Class Solutions, discussed how inflation can diminish retirement savings and what plan sponsors can do to help their participants understand the importance of this.

According to Axsater, 70% of plan participants are worried about inflation; however, 44% of participants have no idea what the current inflation rate is.

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Inflation rates are also a big concern to plan sponsors. Axsater provides recommendations for plan sponsors to gain exposure to their participants on the topic of inflation. He suggests plan sponsors include real assets in target-date funds. He said that real assets have been used for a long time in portfolios. They provide a 10% to 15% allocation on average, which is a significant allocation.

Another suggestion is to use single asset class strategies, rather than confusing participants with multi-asset class strategies.

Axsater also recommends plan sponsors use a single fund that holds exposure to multiple asset classes. By combining these and other asset classes you have a core holding. It also can be well-diversified and have a meaningful impact.

In order for plan sponsors to take action on the topic of inflation with participants, both Axsater and Bell recommend the following:

  1. Define plan objectives in mitigating inflation risk;
  2. Assess how current investment menus addresses inflation risk;
  3. Consider the specific inflation protection needs of participants;
  4. Compare off the shelf vs. custom real assets solutions;
  5. Develop ways to communicate with participants to raise awareness around inflation; and
  6. Review real assets regularly.

 

Both Bell and Axsater add that communication with participants is critical. The majority of them are concerned about inflation and how they should take it into account when preparing their portfolios for retirement.

One of the best ways to communicate the importance of preparing retirement portfolios for inflation is to provide participants with examples they can relate to. One example Bell provides is the inflation cost for ice cream.  In 1980, the average cost for a one gallon container of ice cream was $1.78. The cost rose to $4.48 in 2010. With the current inflation, the cost for one gallon of ice cream will be $10.88 in 2040. This example helps participants see what their purchasing power will be when they reach retirement age.

Bell adds that participants are looking to plan sponsors to provide them with guidance on inflation, and they want help through small steps that are easy for them to accomplish.

Data & Research March 8, 2012

Advisers Have Consultant-Like Qualities

Cerulli Associates’ latest U.S. asset management research found top-tier retirement specialist advisers share more in common with institutional consultants than with other advisers.
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According to “The Cerulli Edge – U.S. Asset Management Edition” March 2012 issue, Cerulli estimates that slightly more than 600 advisers or adviser teams display retirement consultant-like characteristics and require coverage that reflects their approach.

In the past, Cerulli notes, it was not hard to distinguish between retail advisers and institutional consultants. Now, the fee-for-service model, rather than a commission structure, has expanded into the less than $50 million plan market, which has traditionally been the domain of the retail adviser. The top-tier DC adviser firms have transitioned to become registered investment advisers (RIAs), or are dually registered, in order to be compensated through fees and to accept fiduciary status.

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According to Cerulli, this has created a coverage challenge for asset managers. These top-tier DC adviser firms have fully developed practices that do not benefit from the practice management, business development support and other common value-add programs that are offered by defined contribution investment-only (DCIO) wholesalers. Targeting these firms may also not be productive for DCIO wholesalers.

Some wholesalers have indicated that these firms have a developed process for investment selection, and the typical adviser/wholesaler relationship does not have much influence on eventual fund use. Top-tier firms, however, may not have the assets under advisement (AUA) necessary to meet asset managers’ thresholds for institutional coverage, which leaves asset managers to reconsider their DCIO sales model and develop coverage for this adviser group.

Cerulli interviewed some asset managers who have reported success via agreement between the institutional and retail sales teams as to which segment should cover these advisers who fall into the area between institutional and retail.

According to Cerulli, top-tier adviser coverage could be handled by someone in key accounts or by a newly created position. Another change might be to extract the DC team from the retail and institutional segments of the organization and have it report directly to corporate, Cerulli says.

The report is available for purchase by contacting CAmarketing@cerulli.com.

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