Data & Research January 13, 2014

Plan Sponsor Activity Changed Directions

Defined contribution (DC) plan sponsors were less active in certain areas in 2013 than in 2012, according to Callan’s 2014 DC Trends Survey.
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The survey found slightly fewer plan sponsors reviewed their investment policy statements, conducted investment structure evaluations or made manager replacements in 2013 than in 2012. In 2013, 60.4% of DC plan sponsors updated their investment policy statement—down from 63.3% in 2012. The percentage of plan sponsors that conducted an investment structure evaluation to determine gaps or overlaps in the investment offerings was 61.6%, compared with 68.5% in 2012.

Lori Lucas, leader of Callan’s Defined Contribution Practice, tells PLANADVISER, “If you look at 2012, it was a really active year in a lot of these categories because plan sponsors were getting a lot of information about fees acting on that. There is still activity in 2013, but it is leveling off. A lot of the work has been done.” Lucas adds that it is not necessary to perform investment structure evaluations every single year, but plan sponsors should review their investment policy statements every year.

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Thirty-one percent of plan sponsors replaced funds or fund managers for performance-related reasons in 2013, compared with 41% in 2012. “When the market is doing well, we won’t see as much manager replacement,” Lucas explains.

According to the survey report, 2013 was the first year in the survey more plan sponsors decreased the number of funds in their DC plan investment lineup (17.5%) than increased them (9.5%). Lucas says, “Plan sponsors have been giving lip service to a streamlined lineup for years, but there was always an attractive fund out there to improve diversification—for example, Treasury inflation-protected securities (TIPS)—but fewer plan sponsors are looking for such alternatives, and many have already added them.”

While focused less on investment offerings in 2013, more plan sponsors offer automatic plan features and are doing so in a robust way. Is this part of the refocus on participant outcomes? What else does this say about plan sponsor thinking? “A very encouraging sign we saw in the survey was the amount of focus on savings,” Lucas says. “So [plan sponsors are] not only getting people into the plan via auto-enrollment, they are adding auto escalation." She points out that 87% of plans with auto-enrollment now have auto-escalation. In addition, fewer plan sponsors offer auto-escalation as an opt-in feature, not an automatic feature for which participants have to opt out. “Plan sponsors are saying, ‘not only do we want employees in the plan, but we want them saving at adequate percent,’” Lucas says.

“There’s certainly a lot of evidence that when plan sponsors are evaluating features in their plan, they are aware of the impact on participant behavior, and asking how adding certain feature impacts participant behavior,” Lucas concludes. “The focus used to be about participating, now it’s more about outcomes.”

Callan fielded its 2014 DC Trends Survey in the fall of 2013, with responses from more than 107 DC plan sponsors. The survey report is only available to Callan clients.

Data & Research January 13, 2014

Anxiety Casts Pall on Financial Planning

Advisers note that consumer anxiety has a negative impact on financial planning and investment decisions, a survey of financial advisers finds. 
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From missing investment opportunities to prioritizing low risk over the potential for higher returns, Americans’ uncertainty and anxiety are driving their financial decisions, Hartford Funds says in a survey.

It’s no surprise that consumers are anxious about the economy, notes John Diehl, senior vice president at Hartford Funds. Advisers are challenged to manage not just their clients’ investments, but also the emotions and fears that can influence their decisions. “While there are a number of factors to consider, the survey findings underscore the need for both advisers and clients to recognize and evolve certain behaviors in order to effectively pursue their financial goals,” Diehl says.

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Anxiety is adversely impacting client investment decisions. More than half of advisers surveyed (57%) believe clients have allowed their anxiety to adversely impact their investment decisions. This behavior is one of the top two concerns shared by advisers. Market volatility was the most-cited issue keeping advisers up at night, followed closely by client anxiety about saving and investing.

Consumers place higher value on investment certainty than returns. More than three-quarters (76%) of advisers noted that their clients are prioritizing investment certainty over the potential for higher returns. Despite this sentiment, 37% of advisers expect their clients’ risk tolerance to increase over the next 12 months, while only 17% expect clients to become more risk averse. Nearly half (46%) of advisers surveyed expect risk tolerance to remain the same.

Interestingly, this trend of shifting risk aversion follows advisers’ own patterns. Thirty-seven percent of advisers reported their personal investment profile has become less conservative over the past 12 months. Only 10% have become more conservative, with the remaining 53% keeping a steadfast risk profile.

Advisers are seeking alternatives to fixed income amid rising interest rates. Two-thirds (66%) of advisers surveyed indicated that the potential of rising interest rates has led them away from recommending fixed-income vehicles to their clients. The remaining 34% of advisers, who indicated they were not moving their clients out of fixed income, saw various benefits to sticking with their fixed-income strategy. 

Looking to Bonds

Forty-one percent of those respondents attribute their decision to still seeing opportunities in the bond market. About a third (32%) believe that no other vehicles provide the same income and security; and 23% remain confident in the long-term performance potential of fixed-income products. Only 4% indicated a lack of client confidence in the equity market as their motivation for their commitment to fixed income.     

Equity value funds and corporate bond products provide greater clarity for clients. When asked about client anxiety as it relates to various investment vehicles, advisers overwhelmingly cited emerging market funds as anxiety-inducers. Most advisers polled (90%) indicated that these products caused the greatest anxiety among clients. Sixty-five percent of advisers said international bond funds are also a cause for client anxiety.

On the other hand, 73% of respondents indicated that clients were least apprehensive about equity value fund products and 68% cited corporate bond fund products as the least concerning.  

“Anxiety creates a tendency among clients to focus on negative information and, in some cases, seek it out to support their fears and concerns,” says Vernon Meyer, chief investment officer at Hartford Funds. “We arm advisers with the tools they need to educate clients about market realities and the changing economic environment to temper overall investing anxiety. Illustrating how past cycles or events have generally resulted positively can help encourage long-term thinking and make the case for a diversified and balanced portfolio.”  

Hartford Funds, a provider of mutual funds and 529 college savings plans, conducted an in-person survey between September 18 and November 5 of 128 financial advisers against the backdrop of today’s economic environment.

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