Data & Research June 3, 2014

PSNC 2014: One-Size-Fits-All?

At the PLANSPONSOR National Conference in Chicago, four leading experts debated the merits of target-date funds (TDFs) versus target-risk funds (TRFs) and managed accounts.
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These experts started with the question of what is the best way to deliver asset-allocation options to participants.

“It’s important to make sure they are used effectively by participants, which means adopting the best practices of pension plans,” said Scott Brooks, managing director of the institutional group at SEI Investments. “Twenty years ago, many pension plans managed to benchmarks completely ignorant of liability. The defined contribution [DC] liability is the same: the provision of retirement income for participants.” Thus, Brooks said, “whether it’s a TDF, TRF or a managed account—any of these are a good solution.” Secondly, the institutionalization of a portfolio is key, he said, because “fees do matter.”

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Thirdly, the offering should be “something the participant understands,” Brooks continued. “Yesterday Elaine [Sarsynski, EVP of MassMutual Retirement Services Division] said the average participant spends seven minutes on the enrollment survey. Properly allocating assets needs to be done for them.”

Craig Keim, vice president, director of defined contribution investment relationship management at T. Rowe Price Retirement Plan Services, agreed: “Any asset allocation solution is better than what the participant can do on their own with a core menu, even if it is a robust, streamlined core menu.” Next, Keim said, plan sponsors should consider “cost and participant involvement. These frame the question of which is better.”

Then, to figure out which fund is the right one, look at the Department of Labor guidance on target-date funds, Keim suggested. “It starts with analyzing plan goals, be they capital preservation, taking participants through retirement, the risks the sponsor is trying to mitigate. Market risk? Longevity risk? Do you offer a DB [defined benefit] plan along your DC plan? If the fund is the QDIA [qualified default investment alternative], then it has different ramifications.

Glenn Dial, head of U.S. retirement at Allianz Global Investors added, “DC plans have replaced DB plans. It’s tough when you think about picking the right TDF with the tools we have today. What did the DB plan do? It gave participants a pretty certain expectation of the income they could expect at retirement. So ask, ‘How do I get the most participants to an adequate retirement income replacement ratio?’”

That doesn’t factor in savings rates, noted Natan Voris, large market practice leader at Morningstar Investment Management. “Retirement readiness is what we are trying to do,” Voris said. “TDFs don’t control savings rates. We all know the best solution is for participants to meet with a financial planner once a year, but we all know that isn’t going to happen. So the asset-allocation choice should consider not just retirement age, as TDFs do, but also risk tolerance. Therefore, the next step is managed accounts charging 10 to 12 basis points that can offer a customized solution for participants. That is the optimal investment solution.”

A member of the audience then challenged Voris about the lack of a track record on managed accounts, and how this inevitably results in investment committees selecting off-the-shelf solutions for fear of fiduciary liabilities. Voris said that Morningstar always produces backward-looking data for the consumption of the committee, but not for the participants. “We have to provide all the data, all the research,” he said.

Dial agreed that customization is the future for asset-allocation solutions. “We are in the third inning of a nine-inning baseball game,” he said. “We will continue to see evolution in this space. We think custom TDFs will continue to grow and come down market.” Combined with the growing trend to increase savings rates, Dial said, this will have “a tremendous impact on the type of TDF you should offer. They will probably become like managed accounts with prices at institutional levels.”

Voris agreed that the industry is moving toward more customization, predicting that “the gap between TDFs and custom managed accounts will close and include holistic advice on reducing debt” in order to boost participants’ savings rates and retirement readiness.

Further, Voris said, as asset allocation offerings will continue to mimic more and more DB characteristics, they will include specialty funds, such as real estate funds and emerging markets—but not in the core menu.

If the plan sponsor has selected a TDF, they should assess it like a DB plan, Brooks said. “Select best-in-class managers and consistently review them,” he said. “Select an asset allocation target that has the highest probability of reaching your plan’s goal, and using a tactical approach for a portion of the portfolio is a key piece of the puzzle.”

As to participants’ acceptance of asset allocation offerings as the automatically enrolled QDIA, even after steep market drops and volatility, 90% of participants do not opt out, Keim noted. “We then look at the opt-out rate one to two years after the enrollment or re-enrollment in the fund, and see that it is still as high as 75% to 80%,” Keim said, which would suggest that participants like having their money professionally managed for them.

Compliance June 3, 2014

There’s Hope for Retirement Security Policies from Congress

"I think the retirement crisis is beyond a crisis,” says U.S. Representative Reid Ribble (R-Wisconsin).
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Ribble, a member of the House Budget Committee, speaking with Alison Cooke Mintzer, global editor-in-chief of PLANSPONSOR before attendees of the 2014 PLANSPONSOR National Conference, noted that the Social Security Administration keeps moving up the projected date it will become insolvent. The shortfall is projected at $9.6 trillion. If nothing is done, within 20 years there will be drastic cuts to benefits, he said. According to Ribble, there’s tension between those in Congress who have said they will not touch Social Security benefits and those who have said they will not touch taxes. “They make these promises to the peril of older Americans,” he said. “Ten trillion dollars will require additional revenue or a change in benefit structure.”

In addition, according to Ribble, the number of individuals who are saving for retirement has dropped 10% since 2009, and the number that have less than $1,000 saved is 36% (see “Plan Offering Strongly Linked to Confidence”).

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Ribble painted a picture of what drives Congress’ thoughts about solutions to retirement security: “In the peak of their savings years, mom and dad are helping kids pay for college. If you project forward, those college kids are paying for college debt for 20 years, at the same time they are trying to start a family and buy a house, then after the 20 years, they will have to help pay for their children’s college.” The result is a vicious circle making retirement savings difficult for all generations. 

Ribble said Congress is looking at solutions to this problem and other ways to help Americans learn skills for work—i.e., mentor relationships so young people can go immediately into work, learn a trade and not accumulate college debt. “One part of the solution is on the education side,” he told conference attendees.

Society needs to think differently in terms of what will be helpful—put a different value on areas of the economy that actually work, Ribble contended. For example, perhaps no one looks at their newborn and thinks, “I hope he becomes a roofer,” he said, but a mentoring program with a roofing company in 2009 would have started a high school graduate at $17.10 an hour and taught him or her a lifetime profession. “It doesn’t mean people shouldn’t go to college, but it’s another option.”

Congress is also considering changing the tax code to incent people to save for retirement on their own. Ribble contended the President’s myRA proposal may give Americans a foothold in retirement savings (see “myRA Program Details and Intent”), “but there is a shortfall of creative thinking around what employers can do for employees.” Ribble said an idea he’s been kicking around is to let employers take some corporate tax dollars they are sending to the government and instead choose to give the money to workers. Policymakers must shift the paradigm, he said. “The best way for people to have their own security is to own their security. Most policymakers are looking at ways to get people to do it on their own.”

The reason there’s a chance of getting meaningful retirement savings policy done, according to Ribble, is about one-third of Congress has been in Congress four years or less. “There are a lot of newcomers because American people want someone to tell them the whole truth,” he said. “There are legitimate, substantive conversations going on with members of congress, but you don’t hear about it, because it sells more media advertising to put the most controversial items in news.” There are a dozen proposals sharing the theme of requiring employers to auto-enroll and to make a mandatory match, he added.

However, “big changes take a lot of time,” he said, and there are some issues holding big changes back. Ribble noted that Congress now looks a lot like the room of conference attendees—some male, some female, all different races, some liberal and some conservative, but added, “you would be much more pragmatic in finding a solution [to the retirement crisis] because you deal with it every day.” He added that the reason there is no common ground among policy makers is because most do not look for it.

Another problem is how the Congressional Budget Office (CBO) views tax-deferred savings (see “Contributions Could Be Capped in 2015 Budget”). Ribble explained that the CBO is not allowed to score anything dynamically. The shortfall of income from taxes on plan contributions becomes part of debt now. He has introduced legislation that would have the CBO establish a long-term scoring option. “We’re trapped into the rules,” he said.

Another thing that slows change down is Congress’ structure, Ribble contended. There is not just one committee for each policy issue. For example, he noted there are 37 committees that have input on health care. “All of these committees are working in their own silos without any communication with each other.”

Ribble concluded he thinks a big, broad policy on tax reform will happen in the next five or six years, “but we must start with a blank piece of paper.”

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