The Markets May 25, 2017

Plan Sponsors Should Not Fear of Using In-Plan Lifetime Income Products

Prudential Financial says adding guaranteed income solutions in defined contribution (DC) plans can help reduce the amount participants would need to save by as much as 36%.
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Guaranteed income solutions provider Prudential Financial says adding guaranteed income solutions in defined contribution (DC) plans can help bring financial security within reach of employees, helping to reduce the amount they would need to save by as much as 36%.

A Prudential Retirement paper, “On the Road to Financial Wellness, Lifetime Income Is Key,” says offering income that is guaranteed for life is a key component to participant financial wellness.

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While a variety of options have been available for some time, in-plan guaranteed lifetime income solutions are not being used as much as they could. Fewer than half of plan sponsors offer a retirement income solution as part of their defined contribution plan—typically a 401(k)—and only one-fifth of those offer a guaranteed income product, Prudential says.

“The fear of outliving one’s retirement assets is a top concern for many employees as they contemplate retirement. A guaranteed income solution can help assuage their fears about longevity risk and help them weather market volatility,” says Douglas McIntosh, vice president, Full Service Solutions at Prudential Retirement.

Employers who add a guaranteed income option to their 401(k)s have the potential to experience positive outcomes, too, Prudential contends. When employees feel more secure about retirement, they are more likely to retire on time. A 2017 Prudential study found that a one-year increase in average retirement age results in an incremental workforce cost of over $50,000. Also, retirees with lifetime income are much more likely to keep their assets in-plan—helping plan sponsors retain the cost benefits that come with scale.

NEXT: Overcoming fear

Prudential notes in the paper that in-plan guaranteed lifetime income solutions range from immediate fixed annuities, which are purchased at retirement for immediate annuitization, to guaranteed minimum withdrawal benefits (GMWBs), which can be purchased at any time and activated at a set age. It advocates for GMWBs.

According to the paper, some advisers and plan sponsors have shied away from offering guaranteed lifetime income in DC plans, believing there to be a lack of regulatory guidance. But, Prudential reminds plan sponsors and advisers that the Department of Labor and Treasury have relaxed required minimum distribution (RMD) rules, so participants can purchase qualified longevity annuity contracts (QLACs) and have provided guidance for pairing annuities with target-date funds (TDFs). In 2014, IRS Notice 2014-66 provided guidance intended to expand the use of income annuities in 401(k) plans, particularly within target-date funds (TDFs).

In 2015, the DOL released Field Assistance Bulletin 2015-02, which reiterated and clarified the principles set forth in the annuity safe harbor regulation (2008) relating to plan fiduciaries’ responsibilities and liabilities in the prudent selection of an annuity provider.

Also, in late 2016, the DOL issued an information letter stating that a DC plan could prudently choose a default investment for the plan that includes lifetime income elements.

The perceived complexity of in-plan guaranteed lifetime income options has also been a stumbling block for some advisers and plan sponsors. They fear that the product is too complex for participants and may harm plan participation rates. Prudential says that has not been its experience.

The Prudential Retirement paper is here.
Products May 25, 2017

Investment Products and Service Launches

Free Tool Helps Advisers Identify Return-Driven Investment Factors, and Putnam to Launch Alternative Strategies Funds.

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Free Tool Helps Advisers Identify Return-Driven Investment Factors 

Optimal Asset Management (OAM) is aiming to help institutional investors and investment advisers identify and implement investment factors that drive portfolio returns through its Factor Allocator visualization tool.

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This is a free, web-based educational tool that features more than 20 years of historical factor-based index data from S&P Dow Jones Indices. The tool includes a “Factor Playground” feature which provides visual feedback on the impact of various factor choices. A “Factor Fit” tool helps financial professionals estimate the underlying mix of factors driving the returns of a mutual fund, exchange-traded fund (ETF) or active manager. Furthermore, the “Factor Fit” can help evaluate whether it may be appropriate to substitute an investor’s mutual fund or active manager holdings with a combination of low-cost ETFs that target similar returns drivers as the mutual fund or other core holding.

“As Smart Beta, Factor Based Investing and Style tilted strategies become more mainstream, there is an urgent need for easy-to-use tools to help investment professionals educate themselves about how to implement factors in their core portfolios,” says Vijay Vaidyanathan, PhD, chief executive officer of OAM. “We built Factor Allocator to help investment professionals play around and get comfortable with the exciting new generation of factor-based building blocks. Factor portfolios that seek to outperform and reduce risk at low cost can play a transformative role in client portfolios.”

Advisers can register for Factor Allocator at Optimalam.

Optimal Asset Management is an SEC-registered investment adviser specializing in the application of factor-based investing and technology to the asset management process.

NEXT: Putnam to Launch Alternative Strategies Funds

Putnam to Launch Alternative Strategies Funds

Putnam Investments will release several mutual funds that adhere to three alternative strategies aiming to provide advisers and their clients with portfolio construction tools designed to help them navigate varying market conditions. These funds will be sub-advised by PanAgora Asset Management and are expected to be available in the marketplace in the third quarter of this year.

The Putnam PanAgora Risk Parity Fund seeks total return under varying economic conditions through strategic allocation across asset classes. It is a multi-asset solution seeking to balance the fund’s portfolio risks and generate more stable returns and greater downside protection than more traditional multi-asset approaches. The fund allocates to equities to preserve capital during economic contraction by allocating to nominal fixed income, and to protect from inflation with commodities and inflation-linked bonds.

The Putnam PanAgora Market Neutral Fund pursues uncorrelated alpha by investing in long/short equity strategies. It is a systematic long/short global equity market neutral strategy that seeks to generate attractive absolute returns that are uncorrelated to general equity markets by identifying and exploiting multiple inefficiencies that exist in global markets. The fund will pursue a similar approach as the PanAgora Diversified Arbitrage strategy, which was incepted in 2010 for the institutional marketplace. 

The Putnam PanAgora Managed Futures Fund seeks absolute return through a managed futures strategy that is designed to provide meaningful diversification to traditional asset classes. It seeks absolute return through a managed futures strategy that is designed to provide meaningful diversification to traditional asset classes. The fund utilizes systematic long/short exposure to liquid futures and forwards across commodities, equities, fixed income and currencies.

“We have entered an era when the marketplace increasingly understands the need for innovative investment approaches,” says Robert L. Reynolds, president and CEO, Putnam Investments. “These three new products will give mutual fund investors and their advisers access to strategies that have been used successfully by the institutional market for many years. In broadening its slate of alternative offerings, Putnam will be bringing the specialized investment capabilities of our affiliate, PanAgora Asset Management, to our clients.” 

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