The Markets April 28, 2020

Some Comforting Lessons for Retirement Plan Investors

Data from leading retirement plan recordkeepers shows 401(k) and IRA accounts have seen smaller losses than many broad market indices, thanks in no small part to the efforts of plan sponsors and their advisers. Corporate pensions have also fared better than their public counterparts.

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At this stage, reports abound showing the damage done to the equity markets by the coronavirus pandemic.

After a record-breaking bull run, investors at one point in the first quarter saw the S&P 500 touching levels 30% below its February 19 peak. The markets have rebounded some since that time, but they remain depressed and volatile.

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Indeed, according to Fidelity’s internal analysis of first quarter performance, the coronavirus market downturn caused average 401(k), individual retirement account (IRA) and 403(b) balances to drop. The average 401(k) balance was $91,400, down 19% from the record high of $112,300 in Q4 2019, but still higher than the Q1 2010 balance of $71,500 seen in the wake of the Great Recession.

The average IRA balance was $98,900, a 14% decrease from last quarter but also higher than the Q1 2010 balance of $66,200. The average 403(b)/tax exempt account balance was $75,700, down 19% from last quarter but still above the average balance of $50,000 in Q1 2010.

Discussing these figures with PLANADVISER, Katie Taylor, Fidelity vice president for thought leadership, says the numbers are painful to see in one sense, but at the same time they actually underscore the fantastic work being done by retirement plan sponsors and advisers.

“The numbers show that people in the defined contribution (DC) marketplace have access to some very well-designed plans that allow them to diversify and protect their investments,” Taylor suggests. “It is also encouraging that we see very clear evidence that people are sticking with their long-term strategies within retirement plans, in no small part due to the communication and education efforts of plan sponsors and advisers.”

One remarkable fact in the Fidelity reporting from Q1 is that investors actually opened IRAs at record pace, with more than 407,000 new accounts opened at Fidelity alone. And, according to Fidelity’s data, contributions to IRAs among Millennials increased a whopping 64% over Q1 2019.

“It is so encouraging to see that many investors stayed the course and did not make drastic changes to their asset allocations, with some investors increasing contributions to their retirement accounts,” Taylor observes. “However, we know that investors continue to be concerned about how the economic environment and global pandemic may impact their health and financial futures, and we are already seeing the impact of the market downturn on our clients.”

Another bright spot in the markets has been the relative outperformance of investment funds with environmental, social and governance (ESG) mandates, as observed by Nigel Green, the chief executive and founder of deVere Group. Economic and social upheaval, plus the collapse of oil prices, have pushed responsible and impactful investing further into mainstream finance, he says.

“Even before the start of the COVID-19 pandemic, ESG investments often outperformed the market and had lower volatility over the long run,” Green says. “What is perhaps more impressive is that those investments with robust ESG credentials are still typically continuing to outperform throughout the coronavirus-triggered stock market crashes where major indices were extremely volatile, with some plummeting 20%. Clearly, this is going to increasingly attract both retail and institutional investors seeking decent returns in turbulent times.”

Green speculates that the collapse of oil prices, which he says are likely not to rebound to pre-crisis levels in the short term, has also helped drive ESG investments to the top of the performance charts and keep them there.

“This is because ESG funds circumnavigate oil stocks, so their performance will not be adversely impacted by the fall in share prices,” he says. “There is a wider and growing force behind the rise of environmental, social and governance investing. The current situation has acted as a wake-up call in many respects. It underscores that human health is reliant upon healthy ecosystems, that we need to ensure the sustainability of supply chains and that those companies with robust corporate governance and good business practice fare better in difficult times and are ultimately best-positioned for the future.”

On the pension front, there are also some bright spots amid the pain. Of the three institutional segments tracked by the Northern Trust, corporate pension plans subject to the Employee Retirement Income Security Act (ERISA) performed the best, with a reported median return of negative 8.1%. This compares favorably with public funds, which had a median return of negative 12.6%, and foundations/endowments, which produced a negative 11.6% median return in the quarter.

According to Northern Trust analysts, ERISA plans benefited from a large allocation to fixed income securities. U.S. fixed income exposure was 40.4% for the median ERISA plan at the end of the first quarter, a 4% increase from the end of last year. Meanwhile, the median U.S. equity allocation for ERISA plans declined almost 5%, to 23.6% at the end of the first quarter. While U.S. equity exposure remains significant for the Northern Trust-tracked plans, it is down from 33.9% five years prior.

The Markets April 27, 2020

CITs Fit Well With Best Interest Service

Among the attractive but less-often-discussed features of collective investment trusts is the fact that the sponsoring trustee—a bank or trust company—must commit to acting in the best interest of unit holders.

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A new white paper published by Wilmington Trust documents the dramatic ongoing expansion of the U.S. collective investment trust (CIT) marketplace.

The paper, “Collective Investment Trusts: An Important Piece in the Retirement-Planning Puzzle,” was penned by a trio of CIT experts including Rob Barnett, group vice president and head of intermediary sales for Wilmington Trust; Jason Roberts, CEO Pension Resource Institute and managing partner at Retirement Law Group; and Jessica Sclafani, director and defined contribution (DC) strategist for the investment solutions group at MFS.

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As the trio explains, CITs are not newcomers to the retirement landscape. Although first launched in 1927, they did not become broadly used until the 1950s when Congress first allowed banks to combine assets from stock bonus plans, pensions and corporate profit sharing plans.

“CITs are not necessarily new vehicles to plan sponsors, either, as they have long been used by defined benefit (DB) plans and large defined contribution (DC)plans,” the paper says.

As their popularity has grown, the retirement plan marketplace has become more aware of the salient features of CITs, including for example, the fact that since they are not registered under the Investment Company Act of 1940, they are principally overseen by the Office of the Comptroller of the Currency or state banking regulators. One feature that the paper suggests is underemphasized is the fact that the sponsoring trustee of a CIT—generally a bank or trust company—is necessarily committed to acting in the best interest of unit holders because it is bound by the fiduciary standard under the Employee Retirement Income Security Act (ERISA).

Despite their association with the retirement market, the paper explains, CITs are not permitted for use by individual retirement account (IRA) owners.

CITs, TDFs and Transparency

According to the trio, target-date funds (TDFs) are one very clear example where CITs have experienced an increase in the amount of assets under management (AUM). In 2018 alone, assets in target-date CITs increased by approximately $30 billion to reach an estimated $662 billion.

“This growth reflected the DC market’s willingness to embrace a less familiar investment vehicle, relative to a mutual fund, in order to access lower pricing,” the researchers note. “Robust growth in target-date CITs has spilled over into single-asset-class options on the core menu, with advisers realizing that if they are comfortable with a target-date CIT, they also can consider the vehicle in other investment categories.”

The researchers suggest that DC plans’ embrace of CITs shows it is “merely a myth” that CITs are less transparent than mutual funds. This is a common assertion put forward based on the fact that CITs don’t have a stock ticker in the same way as a mutual fund.  

“Most fund managers create quarterly fact sheets for their CITs and provide a data feed to aggregators, such as Morningstar,” the paper suggests. Investment managers are also increasingly partnering with stock exchanges and other stakeholders to roll out “CIT tickers.” According to the trio, at the time of the publication of their analysis, more than 250 such tickers were already available.

Important CIT Considerations

The paper goes into detail to discuss the various virtues of CITs relative to mutual funds, but it is frank in its assessment of the potential “downsides” of CIT investing. In addition to the cost efficiency and fiduciary protections, share class structures inside CITs allow for trustees and asset managers to take into consideration the size of plans, as well as the size of an intermediary consultant or adviser.

While they are generally less expensive than mutual funds, the fees charged for CITs can vary according to the service provided and are based on the assets in trust.

“It is important to understand how fees are assessed,” the paper says. “Costs may include custodial fees, investment manager’s fees and transactional fees related to the investment platform or investment vehicle being used.”

The paper cites an example where an investor holds a stable value CIT.

“As an example, if you hold a stable value CIT, and the insurance company were to charge fees or pass along any potential costs to the CIT fund, that information would need to be disclosed in the participation agreement or offering circular,” the white paper warns. “The participation agreement is the contract you enter into for services performed by the CIT. It will provide the requisite disclosure of compensation, acknowledgment of fiduciary status under ERISA and description of termination terms.”

As the trio explains, this agreement also serves as an acknowledgement of the terms and conditions that may be placed on the investments, “so it should be carefully reviewed by you and your adviser, and the analysis documented.” Something else to consider, according to the paper, is that investing in CITs may be subject to certain terms and conditions, and may even restrict a plan’s ability to freely surrender its interests under certain market conditions.

“Therefore, your adviser should become familiar with the details contained in the participation agreement,” the paper recommends.

A Boon for Advisers?

The paper also includes an in-depth discussion of how the use and understanding of CITs can benefit an adviser’s business.

“Many plan sponsors do not know to ask about lower-cost investment vehicles,” the paper says. “By ensuring access to CITs, advisers can support plan sponsors and participants by maximizing every dollar the participant puts aside for retirement. … By employing CITs as part of the solution, advisers can use their buying power to streamline their work with clients and select a single manager for a strategy.”

Another benefit to advisers is that, with their built-in fee advantages, CITs can bring “relatively low-cost alpha to investors.” In other words, investors can use more tactical active investment management philosophies in CITs while still paying less in fees relative to actively managed mutual funds.

Advisers also should not overlook the potential to create their own white-labeled CIT products. CITs are attractive in this context because there is no need to distribute Sarbanes-Oxley blackout notices, which can impede the process of launching a mutual fund.

“Lawsuits have been brought forth that allege a plan fiduciary failed to fulfill its fiduciary obligations by not investigating lower-cost investment vehicle options, including CITs, when they were available,” the paper concludes. “Advisers can help plan sponsors avoid such allegations by conducting thorough due diligence on the types of investment vehicles that are potentially available to the plan and ensuring that the plan has documented why they chose a particular vehicle.”

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