Data & Research April 15, 2014

A Warm Reception for Alternatives

Investment consultants polled for an annual PIMCO survey voiced near-unanimous support for the use of alternative investments, especially in custom target-date and target-risk strategies.
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Of the 49 consulting firms surveyed by PIMCO for the annual PIMCO Defined Contribution Consulting Support and Trends Survey, nearly all (98%) said they support or strongly support the use of alternatives in target-date portfolios. A vast majority also said the addition of alternatives and other diversifying assets in 401(k) retirement accounts is an essential step to mitigate risk in a persistently volatile investment environment.

According to PIMCO, investment consultants define alternatives as asset classes that fall outside traditional stock and bond categories, such as hedge funds, private equity, long/short equity funds, private real estate and absolute return funds. Custom target-date and target-risk strategies are asset-allocation investments tailored to adhere to plan sponsor defined retirement timelines or risk appetites. 

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Notably, nearly nine in 10 surveyed firms cited daily valuation (88%) and daily liquidity (86%) as important features of alternatives, which may drive more immediate interest in “liquid alternatives,” PIMCO says. Consultants noted volatility reduction (93%), return enhancement (79%) and inflation protection (76%) as the most important benefits that these strategies may deliver.

To mitigate risk and help protect participant assets, PIMCO says the vast majority of consultants also underscore the importance of adding both diversifying fixed-income strategies (94%) and inflation-protection securities (84%) to retirement-related portfolios. Commodities, Treasury inflation-protected securities (TIPS) and real estate investment trusts (REITS) topped the list as the most important inflation-fighting assets. Most consultants believe it is important to actively manage these diversifying asset classes.

When asked to describe their three- and five-year market outlook, most investment advisers cited concerns about rising interest rates coupled with dampened returns and high volatility. Many feel these factors will cause significant headwinds for defined contribution (DC) plan investors. More than half also noted concern about the risk of a sudden market drop or accelerating inflation.

“Institutionalization of DC plans is continuing, with consultants moving more plans to custom strategies and adding diversifying assets, not only fixed income and real assets but also other alternatives to equity risk,” says Stacy Schaus, executive vice president and PIMCO’s defined contribution practice leader. “Including these diversifying strategies should help individual investors better navigate rough waters ahead and speed their journey to reaching retirement security.”

Consultants also continue to anticipate large plans (those with more than $200 million in assets) to decouple investment default options such as target-date funds (TDFs) from administrative service providers’ products. They anticipate the largest plans, those directing more than $500 million in assets, will increasingly favor custom target-date strategies, while plans between $200 and $500 million may select a hybrid, custom or single-manager approach.

Among other findings, the survey found that the target-date glide path structure is the most important factor for plan sponsors to evaluate when selecting a target-date strategy (see “Can You Really Set It and Forget It?”).

Survey highlights can be requested by emailing pimcodcpractice@pimco.com.

Compliance April 14, 2014

Iowa Investment Adviser Restores Funds to Pension Plans

Investment adviser Donald Gene DeWaay Jr., based in Johnston, Iowa, has paid $341,487 to 68 pension plans covered by the Employee Retirement Income Security Act (ERISA).
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The payments were made as part of a settlement agreement following an investigation by the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA). The investigation found that DeWaay, as well as entities he owns and representatives he employed, violated federal law when they recommended certain investments to clients participating in ERISA-covered employee benefit plans between May 2007 and November 2011.

Investigators also found that DeWaay’s companies and advisers charged higher fees than those agreed to by their clients. Recommendations made to clients also resulted in DeWaay, his companies and former employees receiving commissions from third parties. DeWaay has also agreed to pay up to an additional $212,727 over the next five years to other ERISA-covered plans that he managed.

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DeWaay owns or owned three companies based in Johnston, Iowa, which include: DeWaay Capital Management Inc., an investment advisory firm; DeWaay Benefit Administrators LLC, an employee benefit plan administrator; and DeWaay Financial Network LLC, a now-defunct brokerage services firm.

Under the terms of the EBSA settlement, DeWaay and four investment advisers he employed (Joshua Cross, Paul Espey, Andrew Kleis and Brenton Collins) have agreed to disclose to ERISA-covered plan clients whether they will act as fiduciaries to those plans. The investment advisers and companies will also provide their ERISA-covered plan clients a description of all compensation and fees received, in any form, from any source, involving any investment or transaction related to them.

DeWaay and the advisers have also agreed that either they will not collect commissions from third parties or, if they do, they will refund 100% of the commissions to their ERISA-covered plan clients. DeWaay also agreed to be removed as trustee of the DeWaay and Associates Inc. 401(k) Profit Sharing Plan, and to no longer serve or act as a fiduciary or service provider to the plan.

The investigation was conducted as part of the EBSA’s Fiduciary Service Provider Compensation Project, which focuses on the receipt of improper or undisclosed compensation by employee benefit plan consultants and other investment advisers.

More information about the Department of Labor and ERISA enforcement can be found here.

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