PANC 2016: Industry Leaders in Conversation

Speaking during the Industry Leaders in Conversation panel on the second day of the PLANADVISER National Conference, Sean Murray, managing director and head of adviser-sold and platform distribution for the U.S. Defined Contribution (DC) Group at BlackRock, pointed to three critically important numbers: 6.5, five and three.

“So, 6.5% is the return one has earned by being fully invested in a 60/40 portfolio in what I like to call the 401(k) time period, looking back roughly to the mid-1970s,” Murray explained. “And then 5% is what you would have gotten with this portfolio over the last 90 years. Finally, 3% is a number coming out of an actuarial survey—it’s what most investment expert actuaries think the next 20 years will return for a traditional 60/40.”

Mike Miller, head of retirement distribution for U.S. funds management for J.P. Morgan Asset Management, agreed with those figures and concluded, “We simply have to force people to save more, given these numbers.”

For those reasons, the experts agreed, the use of automatic enrollment and automatic salary deferral escalation features probably represent the most powerful way for plan sponsors and advisers to support the real retirement outlook of participants.

“Related to this, asset-allocation solutions such as target-dates funds [TDFs] will remain hugely important,” Murray said. “Frankly, these solutions will have to get even better. Investors need different asset classes that will provide a broader range of return streams and opportunities. This is what the market is working to deliver right now.”

Both expert panelists encouraged advisers to “look for every source of alpha that you can, especially in this low-rate environment.” While this may result in more complexity behind the scenes, the panelists encouraged advisers to remember the wider trend of simplifying plan menus and factoring choice architecture considerations into their work.

NEXT: Lower costs across the board 

Several live-polling questions were fielded during the Industry Leaders in Conversation presentation, finding some impressive alignment of ideas around best practices among the advisers attending the PLANADVISER National Conference.

For example, the vast majority of advisers in the audience indicated they are working proactively to trim the investment menu, and that this work is being accepted and encouraged by plan sponsor clients. Another poll question found strong momentum across the board for pushing clients to lower-cost share classes and towards the consideration and use of collective investment trusts.

Miller noted that “we are definitely seeing a streamlining and real disruption of the traditional investment menu. We are clearly going back to trying to make it much easier for participants to make successful choices, and this is a great thing.”

Both experts agreed with the emerging them of utilizing a “three-tiered investment menu.”

“As a part of this, there is also a rethinking of how we label and present choices to plan participants,” Murray concluded. “At a very high level, we’re seeing a move away from a lineup of dozens of funds to a menu made up of the qualified default investment alternative [QDIA]—usually a target-date fund—along with a small second tier of white-labeled options, and then perhaps a third tier that is an open brokerage window.”

This three-tiered approach has been adopted by a variety of providers, they noted, and “most plan design consultants are selling this model today.”

In conclusion, Murray observed, “We have all seen the studies that show the performance gap between do-it-yourself investors and the people relying on a QDIA. This gap is going to keep growing and growing into the future as asset-allocation models continue to prove themselves. If the participant is not doing as well as the QDIA, why would you as a plan fiduciary allow him to continue down this path?”