The Markets April 5, 2016

Consultants Suggest Tapping Into Active Management

Firms are seeking investment management that will help mitigate risk, according to a PIMCO survey.
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Active management is still the favored investment approach for most major asset classes and target-date retirement strategies, according to the 10th annual PIMCO Defined Contribution Consulting Support and Trends Survey.

PIMCO surveyed 66 consultant firms, which advise on more than $4.2 trillion in DC assets. More than three-quarters of those surveyed said active management is very important or important for U.S. and global bonds; emerging market and other non-U.S. equity; and U.S. small cap stocks. Just fewer than one-quarter of retirement plan consultants said it’s important for U.S. large cap equities. Consultants recommend that plan sponsors diversify retirement portfolios and complement core bonds with allocations to investment grade credit, high yield, multi-sector and foreign bonds within the core menu and/or custom/white-label strategies.

The survey found that meeting participant income goals for retirement is plan sponsors’ most important consideration. Consultants suggest targeting overall income replacement of 80% of final pay, and three-quarters of that may need to come from defined contribution (DC) plans.

“To achieve that goal, consultants are seeking investment management that will deliver sufficient returns and help manage risk,” says Stacy Schaus, executive vice president and author of the survey. “This includes adding diversifying bonds and tapping into active management.”

Most consulting firms also recommend target-date funds as a retirement plan’s qualified investment default alternative (QDIA). They also rank “maximizing asset returns while minimizing volatility relative to the retirement liability” as the most important objective in glide path design. Consultant firms report total assets under advisement within custom target-date, custom target-risk and custom multi-manager/white label of $195 billion, $39 billion and $333 billion, respectively. They expect growth of 8% to 10% over the next three years.

NEXT: Managing fiduciary riskTo manage fiduciary risk, survey respondents recommend that plan sponsors benchmark plan costs, hire an investment consultant, document investment reviews, conduct fiduciary training and move away from revenue sharing. Most of those surveyed did not suggest including index funds.

Sixty-three percent of consultants said they are likely to recommend a capital preservation alternative to clients invested in a non-government money market fund. Sixty-five percent recommend switching to stable-value funds, while 44% suggest a government money market and half are at least somewhat likely to recommend an ultra-short fixed-income option or one tailored for DC plans.

About two-thirds of consultants also recommend adding TIPS and/or a multi-real asset strategy to the core lineup. Most suggest commodities (84%) and REITs (82%) be added to blended strategies in addition to a multi-real asset strategy and TIPS.

Data & Research April 5, 2016

Americans Want Financial Literacy Taught in Schools

Nearly one-quarter of Millennials learn about investing in school.
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Schools are beginning to teach students about finances, and many Americans feel the trend is long overdue.

Eighty-seven percent believe finance should be taught in schools, according to a survey from RBC Wealth Management-U.S. and City National Bank.  Of those in favor of incorporating financial literacy into the classroom, 15% think the instruction should begin in elementary school. The rest, 72%, say it should be taught in middle and high school.

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“Having a basic understanding of how money, investing and our broader financial system works is critical in our society today,” says Tom Sagissor, president of RBC Wealth Management-U.S. “There is a growing realization, particularly in the wake of the last financial crisis, that many people don’t understand budgeting, investing or how simple financial products like loans work. That puts them at a disadvantage not only during their working years, but as they begin to contemplate retirement.”

Thirty-eight percent of Baby Boomers and 37% of Gen Xers said no one taught them about investing. However, that falls to only 29% of Millennials, with 22% saying they learned at least the basics about investing in school.

Parents also report taking a more proactive stance on teaching their children about money. Thirty-seven percent of parents with children over the age of 16 said they have done a very good job of teaching their children about money. To help parents in their quest to teach their children, RBC Wealth Management-U.S. has created a paper, “Seven Ways to Raise Money-Savvy Kids.”

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