The Markets September 16, 2016

PANC 2016: Refining the Fund Lineup

Why managed accounts are viewed as preferable to target-date funds
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Target-date funds have done a wonderful job of getting participants’ portfolios diversified, but managed accounts, which are tailored to an individual’s personal situation, can do an even better job. This was the consensus of panelists on “Refining the Fund Lineup” at the 2016 PLANADVISER National Conference.

“Target-date funds (TDFs) have been a great benefit for participants to diversify, as people have never understood asset allocation,” said Tim McCabe, senior vice president and national sales director, retirement, at Stadion Money Management. Since first being offered, TDFs now have “to” and “through” retirement glidepaths, as well as emerging market and international exposure—and these are welcome developments, McCabe said. However, because TDFs are not transparent when it comes to their actual holdings, it is “hard to evaluate their risks,” McCabe said.

“TDF investors have done well because of diversification and the fact they tend to remain invested in the funds—but each TDF is completely different,” agreed Ryan Mullen, senior managing director, national sales, for MFS Fund Distributors, Inc.

Looking forward, retirement plan advisers should begin to embrace managed accounts, the speakers said. “Moving from ‘do it yourself’ to target-date funds, TDFs have been a wonderful first step” to getting participants’ portfolios to become diversified “but they are built around the average employee,” McCabe said. “People have different risks and savings patterns, and managed accounts are specific to each participant’s holistic situation. They actually personalize the investments and require the investment manager to act as a fiduciary in the participant’s best interest. In addition, they invest 100% of the assets in the fund. While there is no substitute for an adviser sitting down with a participant, that is just not scalable.”

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In addition, managed accounts could potentially offer higher returns in this low-return environment, Mullen said. “You need to ask yourself what you are doing to drive additional alpha,” he said. “Lowering fees helps, but it doesn’t drive alpha.”

Furthermore, advisers need to ensure that people are saving enough and should embrace automatic escalation, said Clint Barker, senior vice president of product strategy and national accounts at Prudential Investments. However, he believes that managed accounts should only be offered to a more sophisticated participant base.

Client Service September 16, 2016

PANC 2016: Defined Benefit Plans

There’s a large opportunity for advisers in the DB plan market.
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“The death of defined benefit plans is overly exaggerated,” Jay T. Slusher, vice president and external adviser consultant with PIMCO, told attendees of the 2016 PLANADVISER National Conference in Orlando.

He shared that in the less than $10 million defined benefit (DB) plan market, there are 28,261 plans, with total assets of about $41 billion. In the $10 million to $100 million plan market, there are 3,275 plans, with total assets of about $115 billion.

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Rodger Metzger, president and chief investment officer at Hooker & Holcombe Investment Advisors, Inc., who moderated the panel discussion, noted that Investment Company Institute data shows the government and private-sector DB market has more than $7 trillion in assets.

Cathy Berg, vice president and practice leader of defined benefit with Transamerica Retirement Solutions, LLC, said these plans can’t go away any time soon; it would take many years. She added that DB plan sponsors have many challenges—regulations, investments, costs—and they need help.

According to Slusher, advising DB plans is less consuming than advising defined contribution (DC) plans. “It’s really about meeting with the plan committee, reviewing funded status and adjusting investments if needed. DBs don’t have the same day-to-day tasks as DC plans,” he said.

However, Berg noted that DB plans do have some similar needs as DC plans—plan governance, fiduciary responsibilities and fee benchmarking. “DB plans also need the documentation of processes that DC plans have,” she said.

NEXT: Getting into the DB plan space

Slusher said if advisers are able to brush up about investment topics, they can differentiate themselves. “Knowing investment strategies and being able to articulate to plan committees how you arrived at allocations is key,” he told attendees.

Metzger added that it is a challenging time for DB plan funded status. “It’s a great opportunity to come in with a strategy. Plus, your audience is the president of the company, not human resources,” he said. According to Metzger, these skills can also apply to endowments and foundations, from which referrals are “staggering.”

Berg noted that providers offer tools for advisers to build their DB skill set. She added that coming in with not just an investment focus, but asking when the sponsor last did provider benchmarking, and looking at how the sponsor manages the plan can make an adviser stand out.

Berg said there is also an opportunity to help with data. DBs have data with custodians that pay distributions, data with payroll and possibly legacy payroll systems and data with actuaries. “These are all in silos and not coming together. Many are still using manual processes. There’s an opportunity for advisers to move data to automation and create a whole new world for DB plan sponsors,” she said.

Advisers should look at their own client base first to find DB opportunities, as some DC plan sponsors may also sponsor a DB plan, Berg suggested. On the other hand, if advisers find a DB opportunity, the plan may be terminated or frozen and there is also a DC plan, providing another opportunity.

“DB plans are a very under-serviced piece of the retirement market,” Slusher said.

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