PANC 2014: Investment Menus

As options proliferate on investment menus, retirement plan advisers will have their work cut out for them, said panelists in discussing investment menus at PANC 2014 in Orlando, Florida.

Defined contribution (DC) plans often look upmarket to the larger plans for strategies and best practices, said Barbara Best, founding partner of Capital Strategies Investment Group. “Everything starts at the jumbo market and gets pushed downward,” she said, “Service providers are pressured to give those services to the jumbo plans and then push them down market to smaller plans.”

Investment menus are no exception, Best said, pointing to statistics that show greater adoption (84%) of target-date funds (TDFs) in jumbo plans. But micro plans are catching up, with 50% including TDFs in their investment lineups. Jumbo plans are much likelier to include money market and stable value options than are micro plans, and—no surprise—employer stock is very frequently used in jumbo plans, but quite infrequently in the micro-plan market. Brokerage windows are understandably more prevalent in jumbo plans, with their greater percentages of sophisticated and wealthier participants.

When looking at the value proposition of a defined contribution (DC) adviser, it is clear that advisers offer their clients a range of services, said Dan Steele, DCIO National sales manager of BNY Mellon. The one service that is a constant is picking the funds and choosing the investment lineup.

Other aspects of a plan and the tools to serve it may change, Steele said, noting the amount of consolidation with recordkeepers and technology advancements in DC plans. Some advisers do not act as fiduciaries, and some use passive investments. But, he stressed, “when you articulate your value proposition to your clients, picking investments needs to be a big piece of it.”

A frequent topic at BNY Mellon is the evolution of 401(k) lineups and the part that alternative investments play, Steele said. Not only can alternatives refer to a lot of different types of assets, the term can mean different things in different channels. “In the DC market, alternatives are anything outside the non-equity style boxes, according to Steele. “We found a proliferation of equity options and not a lot of fixed income in DC plans.”

Steele called the performance disparity between DC and defined benefit (DB) plans natural, and said one reason is the institutional investor management. But another is the offerings in each type of plan: Whereas the average DC plan has 60% U.S. equities, the average DB plan has 27% U.S. equities, he said. One reason for these choices is home country bias.

Placing alternatives in the lineup should be accompanied by an explanation of their function in the portfolio. “We advocate the use of alternatives, not to boost absolute return but to dampen volatility,” Steele said, “and that's what a lot of them do.”

Best wondered about effectively responding to the plan sponsor who says he doesn’t need, say, a commodities fund in the menu. “A lot of it is about education,” Steele said, and teaching participants as well as plan sponsors about diversification as well as dampening volatility with the use of real estate and commodities.