The Markets September 26, 2018

PANC 2018 – Top Trends

A look at actively managed versus passively managed equity and bond funds, blended target-date funds, and with more sponsors encouraging retirees to remain in their plan, how defined contribution plans need to address retirement income solutions.

Reported by

When it comes to the age-old retirement plan industry debate on whether to invest in actively managed or passively managed funds, “our industry focuses on the spin, as opposed to the facts,” said Rick Fulford, executive vice president and head of PIMCO’s U.S. retirement and defined contribution businesses, speaking at the 2018 PLANADVISER National Conference session, “Top Trends.”

“One and a half years ago, we decided to take a look at this active/passive debate with objectivity, looking at the Morningstar direct universe of stocks and bonds and their institutional share class performance over one, three, five, seven and 10 years,” Fulford said. “Passive wins the equity battle. Only 35% of actively managed equity funds beat their indexes at the five year mark.”

When it comes to bonds, with intermediate, global and high yield bonds being the most popular in defined contribution (DC) plans, 85% of actively managed bonds beat their benchmarks, Fulford said.

The reason for the discrepancy between actively managed equity funds and bond funds, he said, is that “the bond market is unique. It consists of a large contingent of non-economic players, folks with an objective other than risk-adjusted returns,” he said. “These include central banks, which perform quantitative easing, defined benefit pension plans interested in hedging and insurance companies with accounting restrictions. They control $50 trillion in bonds, and with the total U.S. bond market being $100 trillion, they can create dislocations.”

Furthermore, he continued, “managing bonds passively is much more difficult and expensive than managing equities. There is a high turnover in fixed income—40%—because bonds mature.”

PIMCO also looked at the fees of actively managed versus passively managed equity and bond funds and discovered that there is a 60 basis point premium in equities for actively managed funds, versus a 30 basis point premium in bonds.

“Actively managed fixed income has a lot of value to add,” Fulford said.  “In equities, there are pockets where alpha can be found and others where there are efficiencies and passive management makes sense.”

With regard to target-date funds (TDFs), flows into passively managed TDFs outpace those of actively managed TDFs by far, primarily because actively managed TDFs typically have fees of 50 to 60 basis points, whereas passively managed TDFs can have fees in the single digits, Fulford said.

Therefore, he said, “I don’t think we will see a resurgence of fully active TDFs but a rise in active/passive TDFs, which have seen significant growth.”

As far as retirement plans helping retirees manage their money, Fulford said that TDFs can play a role in decumulation. But that will be only one solution, he said. “There will be a host of strategies,” he predicted. “We need to make defined contribution plans decumulation vehicles, including investments specifically designed for retirement and getting recordkeepers to permit ad hoc payments. There is a lot more to do.

“There are a lot of reasons why annuities don’t work in defined contribution plans, but the market is starting to move in that direction,” he continued. “A recent Callan survey found that 50% of plan sponsors want to keep retirees in their plan, up from 29% the year before, primarily because sponsors want the scale of more assets. A supply of innovative ideas [on retirement income] will come as a result.”

One solution could be managed accounts, which are offered by more than 50% of retirement plans, he said. “Fifty percent of advisers and retirement plan consultants believe managed accounts provide a better solution than TDFs, but advisers need to lift the hood on managed accounts to look at their glidepaths and level of customization.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

As far as environmental, social and governance (ESG) investing is concerned, “there is a gap between a high demand for ESG among participants versus the supply of ESG funds in DC plans,” Fulford said. “Only 4% of plans have an ESG option.”

There are two main hurdles preventing plans from offering ESG funds, he said. First, the Department of Labor (DOL) issued guidance this year indicating that sponsors might create fiduciary difficulties for themselves by offering such an option, he said. The second is the higher fees associated with ESG funds. PIMCO has incorporated ESG screens into its investment process, which is one way sponsors can find funds that meet this criteria, he said.

Compliance September 26, 2018

PANC 2018: Plan Committee Excellence

To this day, one of the most common reasons plan sponsors turn to advisers is to get assistance with governance, including items such as putting in processes that help avoid litigation and running an efficient committee meeting.

Reported by

The second day of the 2018 PLANADVISER National Conference in Orlando included a broad discussion about the challenges of building great retirement plan committees.

Bruce Lanser, senior retirement plan consultant with UBS Retirement Plan Consulting Group, moderated the panel, which featured Stephen Rubino, senior vice president of institutional services at Financial Engines; Tim Irvin, consultant with Cammack Retirement Group; and Robert J. Rafter, president of RJR Consulting.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

While all agreed the retirement plan industry has evolved substantially in the last decade, they also agreed that to this day, one of the most common reasons plan sponsors turn to advisers is to get assistance with governance, including items such as putting in processes that help avoid litigation and running an efficient committee meeting. Advisers do this by working hand in hand with retirement plan committees.

According to Rafter, there is a “terrific opportunity out there” for advisers to work with retirement plan committees because, simply put, many employers simply do not have the internal expertise to ensure the retirement plan is run in an efficient and compliant manner.

“Doing regular training and working with plan committees will remain a terrific opportunity as the legislative and regulatory picture shifts, and it is a win-win for the adviser and client,” Rafter said. “In my opinion, working with plan committees to make sure they are fulfilling their responsibilities makes your 3(21) fiduciary and 3(38) fiduciary investment services that much more powerful.”

Irvin agreed with that take and added that “getting the right people in the room who can consistently make the right decisions for the plan is a challenge, but it is so crucial.”

“I don’t know that there is a right number of individuals for the committee,” he noted. “Two people is probably not enough. It’s really more about getting good representation of the demographics in the plan, and expertise across finance, staff roles and benefits. I think a group in the mid-single digit range is sensible. And having an odd number of people seems to be helpful to prevent gridlock.”

Rubino and Rafter suggested that, apart from regular ongoing committee training, when there is a change in the committee makeup, this is a great time to level-set the existing members and to educate the new members on the fundamentals.

“A focused training session will make the new people much more confident and, importantly, more competent,” Rafter said. “To a large extent it is the adviser’s role to orchestrate all of this. Through regular and ongoing committee training, you can do a lot to put peoples’ minds at rest while improving the plan outlook.”

The panel agreed that advisers can use litigation examples to wake up plan sponsors, but the real benefit of talking about litigation is to help define the lessons learned and the key processes and procedures that will help defend against a lawsuit in the future.

“You can talk about prudence as a concept but it’s more powerful to point to cases where prudence was an issue,” Rafter suggested.

When it comes to plan committee turnover, the panel agreed that ideally there won’t be a lot, because of the need to view the plan over the long term and with lasting consistency. To this end, the majority of committees the panel works with do not spell out a committee member term limit.

“How do you get people involved and excited in committee meetings? It’s easy, with free food,” Irvin only half-joked. “Simply put, as the adviser, you need to work hard to make the committee meetings engaging and informative. Those of us in the industry may love this topic, but the average person doesn’t find it exciting. One practical tip is to play on peoples’ strengths. Let people know their particular skills are are needed and that they are serving an important and noble purpose.”

The panel shared the final point that documentation of deliberation is so crucial when it comes to proving that a plan committee is acting prudently—and this documentation should be kept up to date and readily available in case the plan receives a Department of Labor (DOL) audit notice.

“The DOL will expect that many documents be sent in advance of the audit,” Rafter explained. “They want plan and trust documents, IRS determination letters, investment policy statements, the last three years of Forms 5500, the most recent investment valuations, minutes from committee meeting and service provider contracts. Having these documents ready to go immediately is so key. It makes the plan look way better in the eyes of the DOL. If you have to ask for extensions this immediately raises red flags for DOL.”

«