Since being hired from Russell Investments more than a year ago, Josh Cohen, managing director and head of institutional defined contribution for PGIM, has spent a lot of time meeting face-to-face with plan sponsor clients across the U.S.
In fact, one of his main roles as head of DC plan business is to sit down and strategize with the firm’s largest and most influential defined contribution plan clients—work Cohen described as “very gratifying.”
“The idea is that I am supposed to lead conversations with these clients that go beyond specific products to instead talk about strategic goals and the industry landscape,” he explained. “Needless to say, plan design questions having to do with retirement income are a hot topic these days out in the field, and fiduciary issues remain an ever-present priority for DC plan sponsors, large or small.”
Asked to talk frankly about what he sees unfolding in the DC plan marketplace, Cohen commented that a big part of PGIM’s own strategy as a provider has been to foster deeper conversations across plan sponsors’ own organizations, “presenting them with a framework for allowing frank and practical discussions between the HR and finance functions.”
“We are also working to tie in plan sponsors’ legal resources and fiduciary resources to really go beyond an investment discussion and to have a deeper strategy debate,” Cohen explained. “It sounds idealist, but it is worth spending time on as a provider. There is a lot of value in having conversations that are not just product driven. Our products have to start with the question of, what are our clients’ objectives and how can we help them get there?”
As Cohen sees it, the “whole retirement income conversation” is a good example of where a deeper discussion of objectives is sorely needed.
“Often when we go out into the marketplace to talk about this topic, there are immediately questions about what products are available right now,” Cohen said. “We know this is a pressing topic for plan sponsors, but we encourage them to first think about their objectives and their workers’ objectives. Only then can we have a constructive conversation about offering retirement income, either within or alongside the DC retirement plan.”
Opportunity in active fixed income
Another pressing topic out in the DC space that Cohen speaks to quite a bit is the fixed income picture—and how active management has excelled in this area in recent years.
“I would encourage plan sponsors to think more about this, and to reconsider the opportunities of using active management on this side of the portfolio,” Cohen said. “Often there is so much more focus on the active-versus-passive discussion on the equity side.”
Cohen cited the example of a recent client roundtable he hosted on the subject of actively and passively managed fixed income to show why more discussion of this topic is needed.
“We recently held a client roundtable of our largest plan sponsors, many of them tasked with running both DB and DC plan programs,” Cohen explained. “While use of active fixed income options on the DC plan menus is still emerging, we also asked them, how many of you use passive management for your fixed income portfolios for pension plan assets. Just a single one raised their hand, and that was a public plan with its own unique pressures to use passive management.”
According to Cohen, with the increased interest in retirement income on the DC side, both guaranteed and non-guaranteed, there is an expanding role for longer-duration fixed income to help individuals meet their specific retirement income goal.
“And just like a pension plan, an individual does not want to naively track a market-based fixed income benchmark that is not designed with an individual lifespan or spending needs in mind,” Cohen suggested.
DC plans on trial
Asked about the impact of the rush of retirement plan litigation, Cohen said this really cannot be overstated. Plan sponsor clients frequently suggest they are feeling constrained by the threat of litigation, “and sadly this feeling is not going to go away any time soon.”
“One of the biggest trends we are seeing, particularly in the large plan space, continues to be a concern about fees and making the plans less expensive and seemingly easier to use,” Cohen observed. “There are positive aspects to this trend, of course, but missing is the deeper consideration of what driving to the floor on fees means for the real value of what plan participants are receiving from providers. I think one of the core vexing issues here is that a lot of the decisions that plan sponsors are called on to make are very long-term in nature, and so they do not have a return that is immediately measurable or apparent. But at the same time, sponsors are beholden to the litigious environment in the here and now.”
The overall result is that plan sponsors broadly are doing whatever they can to reduce their perceived fiduciary exposure and other risks.
“My warning after meeting with so many great plan sponsors is that anyone can get sued in this industry, even if you’re doing a good job by your participants, especially if you are a large plan sponsor,” Cohen concluded. “So you can’t be making decisions just based on fear of litigation. I’ve seen people get sued for having stable value and for not having stable value, for having custom target-date funds or for using off-the-shelf funds; and I’ve seen a plan sponsor that embraced a fully passive menu get sued not for fees but for performance issues. It’s a challenge, but I would just remind plan sponsors that the law requires you to have a prudent process and to follow that process. You can defend yourself quite effectively with a quality process and documentation.”
An update on the white labeling trend
Cohen also pointed to continued interest from some segments of the plan sponsor population on the topic of white labeling of investments, or what PGIM refers to as “building a multi-manager approach.”
“After meeting with many plan sponsors on the subject and facilitating conversations across their HR and finance functions, this interestingly one of the areas where there is somewhat more immediate buy-in and enthusiasm from the financial folks,” Cohen observed. “Often these finance professionals are used to working on the pension plan side where the idea of sponsor discretion and white labeling is more natural, compared with the world of DC plans, which is still coming out of the retail trends of the 1990s.”
As he sees it, Cohen said the HR side may not have as much appreciation of the opportunities of white labeling from the ease-of-investment perspective, and thus they may be more likely to view white labeling in the DC plan as taking something away from participants, because the reporting methods and requirements are different
“We have been collaborating with an increasing number of consultants who are serving as 3(38) outsourced investment managers,” Cohen said. “You can see why the 3(38) providers would favor this approach, because they can exercise their discretion faster and more efficiently. We are seeing more outsourced investment managers building their own multi-manager funds that can be used across their client base. It’s an interesting area of development.”