Data & Research April 28, 2015

Helping Participants Plan Their Distributions

Employees receive education about saving for retirement from their employers, but something rarely discussed is how to make that savings last.
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Retirement plan sponsors should be thinking about the education gap for retirement plan participants, noted Jeffrey R. Capwell, partner at McGuire Woods LLP.

The gap occurs because most participants have some level of access to savings and investment-related education through their employer-sponsored retirement plans. Once the time comes to take distributions from their plans, however, they no longer have access to the same level of information and typically have to pay for any information they get, Capwell explained to attendees of the 44th Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Business at the University of South Carolina, and co-sponsored by PLANSPONSOR.

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Should plan sponsors provide access to information after someone has left employment or should they decide they have no more obligation once an employee is gone? According to Capwell, plan sponsors should think about what is appropriate for them from a business perspective. It may not be the right answer for everyone.

“But if not from plan sponsors, where will participants get the information from?” he queried. “I think there’s a place for employers in the process to provide some very helpful information about distribution and ultimate drawdown of balances. I think we might see some market changes in that regard.”

One consideration for plan sponsors, according to Phyllis E. Klein, senior director of the Consulting Research Group at CAPTRUST Financial Advisors, is whether they want the balances of terminated participants to remain in the plan. It may boost the plan’s asset level and ability to negotiate to get lower administration and investment fees, she noted.

Plan sponsors should also consider whether they are comfortable communicating choices to participants or whether they want someone to do that for them, Klein said.

Capwell warned that plan sponsors must do due diligence on the contracted provider of education or advice, and make sure they know what advice is being given. If something goes wrong, it could come back on plan sponsors as fiduciaries. “You have to be careful the service does not in any way offer a way for an adviser to make money by selling a product or recommending certain investment vehicles,” he said.

Klein pointed out that many plans offer only lump-sum distributions to retiring or terminating participants. “You can’t talk about lifetime income without providing options,” she told seminar attendees. Plan sponsors should consider amending their plans to allow for installments, systematic payments or periodic distributions. “If you only allow lump sums, you’re casting participants into the IRA [individual retirement account] world no matter the cost. If you offer more options, you can at least help them bridge their way into retirement income,” she said.

Holly Harn, senior director of Human Resources at Savannah College of Art and Design, shared her experience as a plan sponsor. Realizing that the type of questions retiring plan participants were asking were those the college shouldn’t answer because the staff are not investment professionals, it hired CAPTRUST in 2010 to educate employees. The college and CAPTRUST offered one-on-one sessions for participants. “CAPTRUST is an independent firm, so they are not selling any product, but looking out for employees’ best interests,” Harn noted.

The college also provides impact statements or gap analyses to participants. “We don’t do it every year because we don’t want employees to get so used to seeing it that they ignore it,” Harn said. The tools tell participants whether they are on target to replace an appropriate amount of income in retirement or not, and include a check box to schedule a one-on-one advice session.

These efforts not only help participants, but also protect plan sponsors from participants who claim they weren’t prepared, Harn said.

The Markets April 28, 2015

Clients Still Need Conservative Investment Options

With numerous Baby Boomers retiring and current market and interest rate risk factors, conservative investment options remain an important part of the retirement plan menu.
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Advisers should continue to advocate for conservative investment options in their plan sponsor clients’ defined contribution (DC) retirement plans, experts say. While use of a conservative fund as a default investment has grown less prevalent under the Pension Protection Act—replaced in many plans by far more aggressive target-date funds or asset-allocation portfolios—this does not mean conservative options should be dropped entirely. 

“We believe conservative options have a place in retirement plans, even as the QDIA [qualified default investment alternative], for a number of reasons—the most important being that participants really struggle with seeing negative returns on their statements,” says Tim McCabe, senior vice president and national sales director, retirement, at Stadion Money Management in Watkinsville, Georgia. If a plan uses a conservative, balanced fund as the QDIA, participants stay invested, McCabe says.

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Following the market crash of 2008, for example, “many participants converted to cash and didn’t get back into the market until 2012—missing the market run up,” he says.

Another consideration advisers should keep in mind when reviewing conservative options in today’s market environment, McCabe says, is that “with six-plus years of significant market gains, now is a really good time to have conservative options in a plan.” He is not predicting a market crash, but he warns the Federal Reserve has indicated it will raise interest rates either as early as this summer or as late as the fall to reflect the market recovery, which could impact the value and volatility of some bond funds. “In a rising interest rate environment, bond funds can lose their value as quickly as equity funds,” he says.

Conservative options do have a place in retirement plans, agrees Winfield Evens, director of outsourcing investment strategy with Aon Hewitt in Chicago. “You want enough options in the lineup so that participants can diversify their risk,” Evens says. Advisers definitely should consider conservative funds, he says. “They have a role in a portfolio, and are likely to become of more interest as the Baby Boomers continue to age.”

Retirement plans have traditionally offered either money market funds or stable value funds as conservative options, Evens says. However, in the past few years, advisers have become twice as likely to recommend stable value funds as money market funds, he says. This is because, due to the low interest rate environment, money market funds have been delivering 0% performance net of fees, while stable value funds, which have an insurance overlay, have been delivering between 100 and 200 basis points, he says.

However, with money market reform causing the funds’ net asset value (NAV) to float—and stable value funds becoming more expensive over time, some retirement plans have been “looking at hybrid solutions, like short-term and ultra-short-term bond funds with various durations,” says Lorie Latham, DC investment director at Towers Watson in Chicago. “We could see plan sponsors embrace other types of short-term instruments in the coming 12 to 18 months—even unconstrained bond funds or multi-manager bond funds,” she says. “They provide an improved risk/reward trade-off.”

Next on the scale from most moderate to least moderate conservative choices would be intermediate bond funds that track a broad bond benchmark, Evens says.

The next tier is balanced funds and managed accounts, Evens says, followed by target-date or lifecycle funds. Advisers need to be especially careful when analyzing target-date funds (TDFs), McCabe says. “Some TDFs for those in their 50s—even those in retirement—have as much as 50% to 60% of the portfolio in equities, partly because the funds are benchmarked against the S&P and we have been in a bull market,” he says.

Target-date fund glide paths should become more conservative for those closer to, or in, retirement, Latham agrees. This is particularly important since 85% to 90% of plan sponsors are using TDFs as the QDIA. “That is where the vast majority of assets are going,” she says.

Other conservative choices advisers might consider recommending are Treasury inflation-protected securities (TIPS), Evens says. Latham believes real estate investment trusts (REITs) and diversified real return options could play a role in fund lineups, either on their own or integrated in a TDF. McCabe even believes that some large-cap value equity funds could qualify as conservative options.

As to how many conservative options advisers should recommend to a plan, McCabe says, “There needs to be at least several—perhaps three or four—including a money market fund, a short-term bond fund and some type of high-grade government bond.”

And as to how advisers should work with sponsors on selecting the right conservative choices for their plan, McCabe says it starts with “the investment policy statement, which will be their guide for the quality of investments. They need to be near the top of their peer groups, have a significant track record of at least five or 10 years and charge reasonable fees. That will shake out the list, and an adviser or consultant can help them narrow down the choices.”

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