Trendspotting

Taking to Alternatives

Retirement consultants seek diversification

Investment consultants polled for an annual PIMCO survey voiced near-unanimous support for the use of alternative investments, especially in custom target-date and target-risk strategies.

Of the 49 consulting firms surveyed by PIMCO for the PIMCO Defined Contribution Consulting Support and Trends Survey, nearly all (98%) said they support or strongly support the use of alternatives in target-date portfolios. A vast majority also said the addition of alternatives and other diversifying assets in 401(k) retirement accounts is an essential step to mitigate risk in a persistently volatile investment environment.

According to PIMCO, investment consultants define alternatives as asset classes that fall outside traditional stock and bond categories, such as hedge funds, private equity, long/short equity funds, private real estate and absolute return funds. Custom target-date and target-risk strategies are asset-allocation investments tailored to adhere to a plan sponsor’s defined retirement timelines or risk appetites.

Notably, nearly nine in 10 surveyed firms cited daily valuation (88%) and daily liquidity (86%) as important features of alternatives, which may drive more immediate interest in “liquid alternatives,” PIMCO says. Consultants noted volatility reduction (93%), return enhancement (79%) and inflation protection (76%) as the most important benefits that these strategies may deliver.

To mitigate risk and help protect participant assets, PIMCO says the vast majority of consultants also underscore the importance of adding both diversifying fixed-income strategies (94%) and inflation-protected securities (84%) to retirement-related portfolios. Commodities, Treasury inflation-protected securities (TIPS) and real estate investment trusts (REITs) topped the list as the most important inflation-fighting assets. Most consultants believe it is important to actively manage these diversifying asset classes.

When asked to describe their three- and five-year market outlook, most investment advisers cited concerns about rising interest rates coupled with dampened returns and high volatility. Many feel these factors will cause significant headwinds for defined contribution (DC) plan investors. More than half of the consultants also noted concern about the risk of a sudden market drop or accelerating inflation.

“Institutionalization of DC plans is continuing, with consultants moving more plans to custom strategies and adding diversifying assets, not only fixed income and real assets but also other alternatives to equity risk,” says Stacy Schaus, executive vice president and PIMCO’s defined contribution practice leader, in Newport Beach, California.

“Including these diversifying strategies should help individual investors better navigate rough waters ahead and speed their journey to reaching retirement security,” Schaus adds.

—John Manganaro

Advice Firms See Virtual Model as a Positive 

Yet the majority do not see it replacing the human touch

A strong majority of broker/dealer (B/D) and registered investment adviser (RIA) firms surveyed by Fidelity Institutional see the emergence of digital advice models as a positive industry trend.

Nearly three-quarters (74%) of broker/dealer and RIA firms view the emergence of virtual financial advice platforms and low-cost online investment management services as a positive industry trend—and one that is here to stay. However, 54% of executives polled also felt digital advisers cannot replace the human element of advice.

When asked for one word to describe digital advisers, advisory firm executives described the new models as “needed” and “complementary,” but with the potential to be “disruptive.”

Poll results support previous research showing two-thirds of mass affluent investors prefer a face-to-face relationship with an adviser. Together, the two pieces of research suggest firms have an opportunity to blend the best practices of the digital advice model with human interaction to prepare for the next generation of investors, Fidelity reports.

“Firm leaders should evaluate the wide range of new models emerging and identify which elements may be useful to embed into their advisers’ practices,” says Sanjiv Mirchandani, president of National Financial, a Fidelity Investments company in Boston. “Overall awareness of digital advice solutions is low right now, with our poll showing that only 13% of executives are feeling very informed about the models. So, education is the first step.”

While the firm leaders polled agreed that the impact of these new models will equate to positive changes for clients in the advice industry, they shared reservations regarding greater confusion about advice options and increased regulatory scrutiny, according to Fidelity. Executive respondents frequently cited concerns over whether regulators will be able to effectively oversee these new models.

The executives polled saw digital advisers as having the greatest impact on the availability and cost of advice for mass affluent investors and raising investor demand for technology, Fidelity says.

According to the poll, many executives are already incorporating some of the digital adviser best practices and solutions into their businesses in order to engage the next generation of investors. A majority of executives report that they are using technology to drive collaboration and ease of doing business (52%).

 —John Manganaro

Younger Workers Take Charge

Generation Y plans for their financial future

The results of “Generation Y Workers: The Principal Financial Group Retirement Plan Participant Study” find saving for retirement is the top financial goal for Millennial workers (63%), followed by paying off student loans (48%) and paying down credit card debt (42%). These younger workers report taking positive action toward making their goals a reality: Eighty percent say they have a monthly budget, and two-thirds have established an emergency savings fund.

The majority of Millennials (58%) believe Social Security benefits will no longer exist by the time they reach retirement age, while one-quarter believe Social Security will be around but with reduced benefits. Even without the help of the government, 79% of Millennials feel confident they will be better off financially when they reach their parents’ current age.

“This generation has seen parents cope with the recession and the impact of not saving enough. Based on those experiences, they are realistic about the challenges ahead but optimistic because they plan to take charge of their own retirement nest egg,” says Greg Burrows, senior vice president of retirement and investor services for The Principal, in Des Moines, Iowa.

When it comes to saving for retirement, 65% of Millennials surveyed for the study said they began at age 25. Yet even with this early start, 63% plan to retire after age 65. Another 22% said they plan on retiring between 60 and 65.

However, the study also finds nearly half of Millennials (44%) have yet to calculate the amount of money needed to retire or have no set goal. For those who do have a set goal, more than one-third (34%) want to save $1 million or more.

“While there seems to be a general sense that our generation isn’t being realistic about their financial future, this research shows we are savvy when it comes to money and investing. We’ve started saving earlier than past generations and recognize we may need to work longer in order to meet our financial goals,” says Jase Johnson, voice of the young consumer senior business strategist for The Principal. “One way for Generation Y to stay on track is by creating a financial plan and a calculated retirement income and savings goal.”

To achieve the American dream, Millennial workers estimate it will cost $3.1 million in today’s dollars. Millennial workers define “the American dream” as being financially secure (77%), having freedom (64%) and owning their own home (63%).

—Kevin McGuinness

Adviser Gold in Small Market

Guardian sees tremendous opportunities in smaller plans

The small-plan market holds tremendous opportunity for advisers, says Douglas Dubitsky of Guardian Life Insurance Retirement Solutions in New York City.

Participants tend to greatly value their workplace-sponsored retirement plan, and plan sponsors, too, are very satisfied with their 401(k) plans, he says. Employers that sponsor a qualified retirement plan in the small-plan market—particularly those that work with an adviser—expressed widespread satisfaction with the offering, according to a Guardian Insurance & Annuity Co. survey.

Virtually all plan sponsors (98%) surveyed for the recent Guardian report, “The Small Plan 401(k) RetireWell Study: What’s Working and Not Working for Small Businesses,” are either “very” or “somewhat” satisfied with their 401(k) plan. Advisers are considered an important component in the successful selection, implementation and management of group retirement plans, the survey also found.

More than half of plan sponsors (61%) that work with a financial professional are “very satisfied” with their 401(k) plan overall, compared with only 40% of sponsors that are “very satisfied” with their plans and do not use a financial professional.

This quantifies an industry trend anecdotally apparent for some time—that there is a wide gap in plan satisfaction between sponsors that work with financial professionals and those that go it alone.

The concept of ERISA expertise is often a big hurdle confronting advisers, according to Dubitsky, who says advisers often shy away from taking on institutional retirement plans because they lack proficiency with the Employee Retirement Income Security Act (ERISA).

More important than expertise in a specific area is partnering with the right professionals, Dubitsky counters. An adviser can work with another provider that has the needed background, products, tools and services to create a full offering.

A well-educated adviser can simplify everything going on in the plan. “This is an important part of the business owner’s overall offering to employees,” Dubitsky says. “People think the war for talent applies only to large companies like Citigroup, but it’s true across the business spectrum—maybe even more so in the small-business market.”

According to the study, nine plan sponsors in 10 think of their 401(k) plan as a useful recruiting and retention tool. “If a retirement plan is considered essential, then why wouldn’t you want to offer it?” he says.

Some common issues raised by plan sponsors as potential disadvantages to offering a plan include out-of-pocket expenses (43%), potential fiduciary risks associated with offering investments and advice to participants (44%), the complexity of workplace retirement plans (41%) and the need to educate employees about managing investments (36%).

The adviser who wants to get started in the small-plan market should keep three things in mind, Dubitsky says. First, a small-business owner usually has no benefits group or human resources (HR) department. The financial adviser’s job is to alleviate worry and stress by offering multiple services and providing expertise in these areas.

Next, the adviser does not need to be an ERISA expert, but must align with those who are.

Lastly, bear in mind that the small-plan market has substantial opportunity, and that capturing a small plan is worthwhile.

—Jill Cornfield