Demand for Custom Target-Date Strategies Keeps Growing

Defined contribution (DC) consultants said they are providing custom asset-allocation services, such as target-date strategies, to an increasing number of clients, according to a PIMCO survey. 

PIMCO’s “4th Annual Defined Contribution Consulting Support and Trends Survey” looked at 30 U.S. consulting firms across the U.S., serving nearly 2,000 plan sponsors with aggregate DC assets of $1.7 trillion. 

The overwhelming majority of consulting firms (90%) offer DC custom-strategy consulting, representing a slight increase from 84% in 2009 and 2008. Furthermore, smaller plans show more interest in custom strategies. The median plan size for custom strategies is now $95 million to $2 billion in 2010, compared to $125 million to $4 billion in 2009.

The majority (90%) of the consultants polled offer custom target-date products, and 82% are offering to act as a fiduciary for their custom services, such as managing the target-date glide path.  Consultants also identified more than 20 recordkeeping firms that support custom strategies.

Much debate has surfaced over target-date glide paths and whether some target-date funds were too aggressive, leading to losses amid the market downturn. Consulting firms have mixed feelings about whether target-date glide paths were appropriate in light of how they performed during the market crisis: 44% believe existing glide paths were somewhat to highly inappropriate, or too aggressive.

The target-date debate is part of a larger debate about how much equity participants should be in at retirement, and consultants are mixed about that determination as well. More than half (54%) of surveyed consultants said the appropriate allocation to “uncertain assets” (such as equities) at retirement age is 30% to 50%. A third said less than a 30% allocation is appropriate.

Consultants do agree on one thing: Every company is different. The vast majority (89%) of consulting firms believe different demographics among companies should drive unique glide paths, according to the survey.

Plan Design Trends

Three-fourths of consulting firms reported that their clients prefer retaining retiree assets, yet most do not actively encourage retirees to keep their assets in the plan.  A fifth of the consultants noted clients are somewhat likely to add a “deemed IRA” to their DC plan to allow retirees and their spouses to consolidate assets within the DC plan.

Furthermore, plan sponsor clients will add a retirement income option in the next two years, according to four-fifths of surveyed consultant firms. The top three products of interest are fixed annuities, living benefit insurance, and longevity insurance.

Managed account prevalence will likely stay the same, according to 53% of surveyed firms, but 47% expect to see an increase of managed accounts among their clients.

In the alternative space, collective investment trusts (CITs) are critical in serving DC clients for more than half (60%) of surveyed firms. Exchange-traded funds (ETFs) also have rising support. While 43% believe ETFs have no place in DC plans (beyond a brokerage window), the same percentage believe they might have a place in DC plans in the future, depending on product development. Only a slim percentage (13%) of consultants sees a current place for ETFs in a DC lineup.

Amid the recent financial crisis, consultants said the most common actions taken by plan sponsors were to decrease or suspend the company match (70%) or add Treasury Inflation-Protected Securities (TIPS) (62%). However, 62% said no action was common.

Surveyed firms said the top three asset classes that would bring the most value if added to DC plans are TIPS (82%), emerging-markets equity (57%), and commodities (54%). Half of the consultants suggested the addition of guaranteed income or annuity products, while about a third noted global fixed-income (36%), real estate investment trusts (REITs) (36%), absolute return (32%), global tactical asset allocation (GTAA) (29%), and high-yield debt (29%), according to the survey.