The Markets June 12, 2017

PSNC 2017: Investment Trends Put Premium on Savings

Even with more innovative approaches to building menus, the experts agreed that workers today “will not be able to invest their way out of the major challenges they face.”
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Investment returns in the next 10 to 15 years are projected to be about half of what they were in the preceding two decades, Sean Lewis, vice president and investment strategist for BlackRock, warned attendees of the 2017 PLANSPONSOR National Conference.

Lewis shared his forward-looking expectations during the panel session, “Trends in Fund Lineup Construction,” which was moderated by Earle Allen, partner at Cammack Retirement Group, and also featured Holly Donovan, marketing manager of defined contribution (DC) for Invesco, as well as Michael Swann, director and DC strategies for SEI Institutional Group.

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The esteemed panel all agreed that, widely speaking, the DC retirement planning industry continues to migrate toward streamlined and simplified investment menus—especially the “three-tiered” approach with which many sponsors will already be familiar. Under this approach, the panel explained, the first tier of the menu is populated by an auto-diversified qualified default investment alternative (QDIA), likely a target-date fund (TDF) or managed account. The second tier is more or less your classic core menu, with anywhere from five to 15 or even 20 funds, possibly white labeled, for use by participants who prefer to design their own allocations, ideally with advice from a professional. Finally, the third tier is comprised of a brokerage window, wherein the small handful of investment experts enrolled in the DC plan can do their thing and access the whole mutual fund marketplace. 

Even with this innovative approach to building menus, the experts agreed that workers today “will not be able to invest their way out of the major challenges they face.” Simply put, with weaker investment returns anticipated for the foreseeable future, workers will have to save more, potentially much more, to meet their long-term goals.  

“No investment menu or allocation is going to help you the way that buckling down and saving more will help you,” Swann observed. “Still, it is going to be helpful to make sure your investment options offer a sufficient chance for real diversification, and the fees must be appropriate.”

To that end, Donovan urged plan sponsors to consider ways to blend the benefits of active and passive investments, and to consider using collective investment trusts (CITs) on their menus. She suggested that in general CITs can be 10 to 40 basis points cheaper than their mutual fund analogs, while delivering practically the same return performance.   

Swann and Lewis agreed this is an important opportunity. They also urged plan sponsors to think more deeply about the fixed-income side of the menu—and about in-plan retirement income options.

“You cannot just invest in basic fixed-income as a retiree today,” Lewis warned. “You need to maintain diversified equity holdings as well as fixed income, perhaps actively managed fixed income, even. We need more risk-reward diversification on menus for both workers and retirees … to get away from just market cap approaches.”

In Practice June 12, 2017

Robo Advisers Need to Incorporate Human Touch

This is particularly true as investors age.
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Gone are the days when an investor could answer a few questions online with no follow-up advice, according to the latest issue of The Cerulli Edge. To survive, digital advisers, or robo advisers, need to incorporate advice from a live adviser. This hybrid formula works well with middle-market advisers with $100,000 to $500,000 of investable assets, according to Cerulli.

Cerulli recommends that digital advisers still use an online profiling tool for investors that will place them into an asset allocation model. The tool should also aggregate information about all of the investor’s holdings. The adviser can then present the algorithm’s recommendations by telephone or Web-ex and speak with the investor about his or her goals. Then, every year, the adviser touches base with the investor to find out if there have been any major life changes or new goals.

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“During the past six months, managed account offerings that combine digital advice with access to a human adviser have emerged as digital advice’s second act,” Cerulli says. “Digital advisers are starting to better understand the needs of investors of different ages by offering hybrid models that bring together the best of financial advisers and automated investing.”

While 70.8% of households in the U.S. have investable assets of less than $100,000, the next tier is the middle market, with $100,000 to $500,000 of investable assets, with $234,855 as the average. Cerulli says this is the sweet spot for the hybrid model. The reason for this is because middle-market investors tend to focus on only a handful of financial goals, such as planning for retirement, saving for a child’s education, building a nest egg, and, once they retire, turning their holdings into income, according to Cerulli.

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