2008
Investment Survey – The Right Pieces

Advisers share their preferences for building a plan investment lineup

Selecting a retirement plan’s investment lineup is frequently the job of the adviser or consultant working with the plan sponsor. After all, the client is likely to ask the adviser to help draw up the criteria for selecting such investments in the investment policy statement (IPS) (see “Statement of Purpose"), so why not help pick the funds to satisfy that policy? Nearly all advisers surveyed provide IPS design and investment monitoring and ongoing committee meetings as part of their regular service (96.9% and 98.2%, respectively).

When asked their perception of tools used to select or monitor plan investment options, advisers gave Morningstar the highest ranking, with 58.3% of advisers expressing a “very favorable" perception, followed by Fi360 (45.4%) and Zephyr (40.9%). Beyond core investment management services, advisers look to investment management firms most commonly for research (56.5%), marketing collateral (44.9%), and conferences (41.3%).

Nearly all (94%) advisers surveyed rely on performance compared with benchmarks as one of their top five considerations for fund selection and, of those who accord that level of importance, just more than half (53%) say it is their number one criterion. Other factors cited were manager tenure (76% said it was a top five factor—not surprisingly, considering its impact on both performance and potential style drift) and five-year performance (73%). Rounding out the top five considerations were fee structure for the plan (something that might take more prominence with the introduction of final disclosure regulations), and style drift (64% and 61%, respectively).

When asked to select the funds that belong on an “ideal" defined contribution investment lineup, large cap ruled the day, with large cap value cited by 92.7% and large cap growth named by a nearly identical 91.7%. Target-date funds were selected by 79.8% of advisers, tied, in fact, with fixed income or stable value. Conversely, target-risk funds were selected by just half that many (39%).

It will come as no surprise that target-date funds have been a popular investment option, a trend likely to accelerate following the qualified default investment alternative (QDIA) regulations from the Department of Labor. What is interesting is that those solutions were much more likely to be recommended in the “real world" (93.9%) than they were to appear on the “ideal" menu.

Advisers continue to shift toward target-date over target-risk solutions. Like last year, target-date funds were more likely to be recommended by advisers than target-risk funds (unlike a survey two years ago, which found the reverse); 71.5% of advisers recommended target-date over target-risk solutions. Even at this relatively early stage in the product cycle, more than half (57%) of advisers do not bind themselves to recommending lifecycle or lifestyle funds from the plan’s recordkeeper, opting instead for nonproprietary funds.

METHODOLOGY

In July 2008, approximately 7,500 online survey questionnaires were sent to financial advisers from the PLANADVISER database, as well as client lists supplied by DC recordkeepers. We received 382 usable responses, of which 247 passed our eligibility criteria for the section reported here that the adviser be “personally involved in evaluating and recommending fund choices on behalf of qualified plan clients.’ The questionnaire, developed by PLANADVISER editorial and research staff, consisted of more than 40 questions, with more than a dozen questions about investment evaluation and selection for qualified plans. The survey also asked questions about the scope of the adviser’s qualified plan business, as well as opinions about DC recordkeepers, responses from which will be published in future issues.

RESPONDENT DEMOGRAPHICS

Years advising corporate retirement plans

Less than 3 years: 6.10%
3-10 years: 35.20%
10-20 years: 35.70%
More than 20 years: 23%

Total assets under advisement

Average: $1.2 B
Median: $200.0 M

Assets under advisement in retirement plans

Average: $1.0B
Median: $117.5 M

Adviser firm affiliation

National full-service wirehouse: 29.70%
Independent broker/dealer: 37.80%
Regional broker/dealer: 5.70%
Insurance brokerage: 3.30%
Bank brokerage: 0.80%
Registered investment adviser (RIA): 17.90%
Dually registered: 4.90%

Compensation

Asset-based fees: 85.70%
Commissions: 53.30%
Hard dollar or flat fee: 29.90%
Per participant: 7.40%
Per project: 23.00%
ERISA budget/ERISA reimbursable: 24.20%
Other: 2.90%

What is your target market?

$500,000-$2MM: 21.30%
$2MM-$20MM: 53.30%
$20MM-$75MM: 16.30%
$75MM-$200MM: 7.10%
$200MM-$500MM: 1.70%
$500MM+: 0.40%

SURVEY RESULTS

Criteria in deciding funds (percent of mention in top five)

Performance (1-year return): 28%
Performance (5-year return): 73%
Performance vs. benchmarks: 94%
Manager tenure: 76%
Brand: 21%
Style drift: 61%
Adviser support: 13%
Supporting materials: 14%
Fee structure for adviser: 11%
Fee structure for plan: 64%
Plan demographics: 35%

Recommend a minimum or maximum number of funds?

Yes: 49.50%
No: 50.50%

Advisers were asked what funds belonged on an ideal DC plan fund lineup and the funds they most often recommend to clients within each investment category.

Mutual funds most recommended to a plan sponsor (number of mentions in top 5)

1. American Funds Growth Fund of America (66)
2. PIMCO Total Return (41)
3. American Funds EuroPacific Growth (29)
4. Davis New York Venture (24)
5. Thornburg International Value (17)

Most preferred fund families (number of mentions in top 5)

1. American Funds (123)
2. Fidelity (62)
3. PIMCO (43)
4. Oppenheimer Funds (39)
5 T Rowe Price 39

Recommend target-date or target-risk funds?

Yes: 93.90%
No: 6.10%

If you do recommend asset allocation funds, they are:

Target-date: 71.50%
Target-risk: 28.50%

If you do recommend lifecycle/lifestyle funds, they are:

Proprietary funds: 43.00%
Nonproprietary : 57.00%

Favorite target-date/lifecycle fund suite

1. T. Rowe Price: Retirement Date Funds (20.00%)
2. AllianceBernstein: Retirement Strategy (14.90%)
3. Fidelity: Fidelity Freedom (13.70%)
4. American Funds: American Funds Target Date Retirement (9.10%)
5. John Hancock: JH Lifecycle (8.60%)

Favorite target-risk/lifestyle fund suite

1. John Hancock: JH Lifestyle (23.40%)
2. Russell Investment Group: Life Points Target Risk (9.00%)
3. AllianceBernstein: Wealth Strategies (8.30%)
4. Vanguard: Vanguard LifeStrategy (7.60%)
5. Nationwide Trust Company, FSB Retirement Resource: Gartmore (6.90%)

Illustration by Charles Immer