Products September 9, 2013

Pru Looks to Engage Participants in TDFs

What happens on the first day of retirement? Prudential Financial Inc. shines a light on participant stories with the Day One target-date funds (TDFs).
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According to research, every day for the next 20 years, 10,000 baby boomers will turn 65 and many of them will be unprepared to retire, Prudential pointed out.

To help people address the challenge of saving enough for retirement, Prudential Financial’s retirement and investment management divisions put together the Day One Funds with a renewed focus on engaging plan participants through the company’s suite of Qualified Default Investment Alternative (QDIA) eligible retirement planning products.

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The Day One name leverages the success of the company’s Day One advertising campaign aimed at inspiring plan participants to think about their first day of retirement. On the Prudential site are videos of people’s stories.

“The stories are resonating fabulously,” Joan Bozek, senior vice president, investment products, Prudential Retirement, told PLANADVISER. “There is a lot of excitement.”

Prudential also cited research that says the average American life expectancy is estimated to be 83 years by 2050. This increased life expectancy brings with it the challenge of funding retirements that can last 30 years or more. The funds are modeled with the assumption that participants may live to 95.

Issued by Prudential Retirement Insurance and Annuity Company, the Day One Funds will be available to eligible retirement plans and are based on the analysis of real savings rates and employer contributions from 850,000 plan participants. The funds feature a competitive glide path designed to help improve investment return potential in early years, and then shift allocation to help manage risk as participants move toward and beyond retirement.

Glide Path Allocations

The glide path begins with a 97% allocation to U.S. and international equities, commodities and real estate to provide for potential growth. As the participant ages and nears what Prudential terms the Retirement Red Zone—the 10 years before and after retirement—exposure to equities decreases and the funds significantly shift to more conservative investments. Equities exposure continues to decrease during retirement, and the asset allocation stabilizes 10 years after the target date at 26% equities, 9% commodities and real estate and 65% fixed income.

“The Day One Funds represent a target date fund strategy that seeks competitive returns while helping protect against market risk through diversification,” said Michael Rosenberg, senior vice president, Prudential Investments. “We understand the challenges and complex choices participants face with investing for retirement. In response, we’re developing tools designed to engage plan participants in a meaningful way to help humanize these important investment decisions.”

A feature of the funds is the inclusion of non-traditional asset classes, like commodities and real estate, as well as Treasury Inflation Protected Securities (TIPS).

The funds include a competitive four-year track record, are offered in five-year increments through 2060 as well as the Income Fund for current retirees and individuals nearing retirement, and are available in 12 diversified portfolios across multiple share classes.

Other features include:

  • Equity exposure across market capitalization and geography to provide access to a broad opportunity set;
  • Utilization of active, passive and quantitatively managed strategies to provide diversification and balance;
  • Fixed-income asset classes to help provide stability as the target date approaches;
  • Non-traditional asset classes to offer potential for increased returns with low correlation to stocks and bonds and the potential to hedge inflation;
  • Private real estate and TIPS to help mitigate market volatility; and
  • Cost-effective fee structure is being offered across all Day One Funds.

“Now more than ever before, American workers need solutions that help them reach their ‘Day One’ of retirement confident that they will have the income they need for all the days that follow,” said Jamie Kalamarides, senior vice president of institutional investment solutions, Prudential Retirement.  

Information and links to videos of participants’ stories are available here.

Compliance September 9, 2013

PANC 2013: Regulatory Update

Retirement plan regulations have been pushed aside for a bit following the Supreme Court decision about the Defense of Marriage Act (DOMA).
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Speaking to attendees of the 2013 PLANADVISER National Conference in Orlando, Florida, David C. Kaleda, a principal at Groom Law Group Chartered, said there has been some juggling and reprioritizing after the decision in United States v. Windsor, in which the high court found unconstitutional the federal government’s policy not to recognize same-sex marriages. He noted that the Treasury has issued a revenue ruling saying the “state of celebration” will define who is married for federal tax purposes, but the Department of Labor (DOL) will take some time to issue its guidance since it will have to coordinate with other agencies for its rules.

However, the industry has seen “tips” from the DOL for plan fiduciaries regarding target date funds (TDFs). (See “DOL Offers Tips on TDFs”) Kaleda said most items are already in practice, but advisers should take note of the DOL’s hint to at least ask whether custom TDFs are right for a plan.

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The agency also issued an advisory opinion this year about revenue sharing (see “Certain Revenue Sharing Payments Not Plan Assets”). Basically, the agency decided that payments held as bookkeeping entries and not assets in a trust are not plan assets.

Kaleda said the industry should also take note of the DOL’s settlement with ING regarding correcting plan errors (see “ING Settles with DOL on Processing Error Policy”). The lesson to be taken from that case: if a recordkeeper corrects a recordkeeping error in order to make participants whole, and a gain is made by assets when correcting that error, the recordkeeper needs to disclose to plan sponsors what they do with that gain.

The industry is still anticipating the DOL’s re-proposal of its definition of fiduciary. Advisers are anxious, and they should be, Kaleda contended, noting that the agency now refers to this rule as “the conflict of interest rule – investment advice” on its regulatory agenda. The Securities and Exchange Commission is also considering standardizing its rules for registered investment advisers (RIAs) and broker/dealers, so the question is, when the DOL definition comes out, will it be aligned with the SEC rules?

Kaleda said he believes the DOL will also use the Government Accountability Office (GAO) report about rollovers (see “Solutions Exist for Easier Plan-to-Plan Rollovers”) to argue why they need additional rules about rollover advice.

However, there will be another comment period when the redefinition is issued, and Kaleda expects there will also be hearings, so there will be no final rule for about another year.

Finally, Kaleda noted the industry is still waiting on guidance about TDF disclosures, and he expects the DOL’s rules will be similar to SEC rules about how these funds are presented. Kaleda said he also believes the industry will see a standard format guide for 408(b)(2) service provider disclosures.

Even though it is distracted by the DOMA ruling, “I have no doubt enforcement will be a DOL focus,” Kaleda concluded.

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