Data & Research September 26, 2018

Misperceptions Over the Affordability of Using an Adviser

A survey by OneAmerica indicates roadblocks in affording financial adviser services. 

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Just 4 out of 10 retirement plan participants use a financial adviser, with misperceptions over affordability and applicability driving their hesitancy, according to a survey by OneAmerica.

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“It appears that those participants who work with a financial advisor sleep better at night,” said Marsha Whitehead, OneAmerica vice president of enterprise marketing. “Our survey also shows that those who work with a financial advisor report having lower financial stress and higher knowledge on more retirement and financial-related topics. It is important for participants to understand this correlation and why working with a financial adviser, and having an advocate in their corner, may make financial sense.”

What is the roadblock to working with a financial adviser, according to the survey?

Forty-three are concerned that they cannot afford fees; 

41% believe that thy don’t have enough wealth; and 

41% have not seriously considered the issue.

Only 22% of women reported working with a financial adviser, compared to the 57% of men. Survey results show that women are less likely to work with a financial adviser due to beliefs that they cannot afford the fees associated and that they aren’t wealthy enough to work with one. Inversely, of the men that don’t work with a financial adviser, the survey finds that men choose not to reach out to a financial adviser because they don’t believe they need assistance, or because they are worried about potential misconduct.

The 40% of participants who reported working with a financial adviser is a 5% increase from a survey OneAmerica conducted in 2013. And in the past five years, the company has seen the age of participants who work with a financial adviser trend lower.

In 2013, participants who worked with a financial adviser tended to be age 50 and older compared with the current study which shows that participants who work with a financial adviser tend to be age 35 and older.

Prior, OneAmerica research has identified that participants who work with a financial adviser are more likely to have calculated their retirement income need, are less likely to cite debt as a deterrent to contributing to their retirement plan, and appear to be more confident about their ability to maintain their current lifestyle in retirement.

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.

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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.”

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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.

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