Mike Miller, J.P. Morgan Asset Management (left); Sean Murray, BlackRock (right)At the 2016 PLANADVISER National Conference, Mike Miller, head of retirement distribution for U.S. Funds Management at J.P. Morgan Asset Management and Sean Murray, managing director and head of adviser-sold and platform distribution for the U.S. Defined Contribution Group at BlackRock, spoke with Alison Cooke Mintzer, editor-in-chief of PLANADVISER about industry trends and what advisers can do to capitalize on them.
Cooke Mintzer: As we look ahead, modest return expectations and potentially lower-than historic-interest rates are likely to increase the challenge for defined contribution [DC] plan participants to save enough for retirement. What are core areas for advisers to be considering regarding this environment?
Murray: Asset-allocation solutions such as target-date funds [TDFs] will remain hugely important, but these solutions will have to get even better. When looking at target dates, make sure they have different asset classes that may be able to provide a broader set of return streams. Does the strategy include international and emerging market investments which may be able to offer diversification and other sources of return? Does it balance risk and return effectively, and at what cost?
Then looking at the core lineup, I think it’s imperative to start looking for portfolio managers that have demonstrated the ability to outperform over various time periods and offer those solutions to your plan participants. I also think there are opportunities for advisers to potentially rethink passive. There’s been a lot of talk about smart beta and alternative strategies that seek to provide enhanced returns while maintaining a low-cost structure. Your job as a fiduciary is to be able to ensure that your participants have the ability to navigate this low return environment to retire with dignity.
Cooke Mintzer: How are you seeing fund lineups consolidated, or plan investment labels being rethought, at the plan level?
Miller: About three years ago, J.P. Morgan rolled out a framework called Core Menu InnovationSM, and the concept was to take the core menu and create diversified portfolios in distinct buckets: cash; fixed income; and equity. This simplifies the core menu while still providing participants with diversified, professionally managed investment options.
When streamlining the core menu we also think about the participants in the plan and we typically group them into three buckets. First are the participants we identify as delegators who want someone to make decisions for them.
Next are the participants who would like some guidance, but also want the ability to make some investment decisions. We would provide these individuals with the ability to select from a streamlined investment selection of diversified cash, fixed income and equity solutions. The third participant group would be those who want even more choice, and for them there is a brokerage account.
Cooke Mintzer: How do you evolve investment strategies to continue to make the most of complex markets, and then still maintain simplicity for participants?
Murray: I think target dates are an elegant solution for most participants, but in terms of the core menu, we wholeheartedly believe in white labeling, mixing managers together and mixing active and passive. We want to create an environment whereby you can still select the target date that you want for your plan, and match the glide path to the participant base that you all are working with, but also offer diversified and customized white label solutions to your clients.
Cooke Mintzer: How can advisers have that conversation with plan sponsors about how to mix passive and active investment options, and what roles do you see for each of those strategies, within a fund lineup?
Miller: The underlying building blocks within target date funds can be passive, but the reality is someone is making an active decision around the asset allocation. There’s going to be some inherent risk by having a target date fund that is an all-index solution. Many plan sponsors feel that there is safety in index options, as they look at much of the litigation that’s taken place in the marketplace. As advisers and consultants, your role as a fiduciary is to help guide them and consult them on the pros and cons of index options.
We work with many advisors and plan sponsors who believe you can have a range of both active and passive. To meet the many needs out there, J.P. Morgan has a range of implementation options for our SmartRetirement target date series.
We have a fully active solution, and we also have a passive blend product that combines the best of both worlds – the lower cost of a passively managed strategy, but active management in asset classes where we can add the most value. Our fully active product, over the long term, has outperformed our passive blend strategy.
If you are considering a passive solution, and fees are an issue to you, we believe that the best solution is a blend product, as we don’t think in today’s environment that you will be able to gain the alpha you need to succeed from a purely passive strategy.
Cooke Mintzer: How can advisers improve their TDF evaluation process and what factors should they be considering?
Murray: It starts with understanding the plan sponsor and the participants inside of that plan. Understanding their risk tolerances and their needs, and then matching the appropriate glide path—regardless of whether it’s active or passive—to that plan is the most imperative piece.
The other level of due diligence you need to be doing, is what types of asset classes are underneath? What sort of returns, relative to their respective benchmarks, have the underlying managers captured? I think going through this process and identifying your three go-to conservative, moderate, and aggressive strategies would help you be in a much better place in terms of being able to match the right TDF to the plan.
Cooke Mintzer: What trends are you seeing in plan design, and what changes are the most influential on participant success?
Miller: We are seeing automatic features becoming more and more popular with plan sponsors. Based on our 2016 Plan Participant Research, when participants were automatically enrolled in a plan, 98% were satisfied, and when combined with automatic escalation, 97% were satisfied. From a plan design perspective, we feel the focus should be on getting participants in the plan and getting them to save more.
I think re-enrollment will be the next big trend we see in plan design. It’s going to be really important for us all to be advocates for re-enrollment, and we have seen many of our largest plan sponsor clients implement this strategy.
We’ve had huge success with re-enrollment in our bundled offering, with about 70% of new plans conducting a re-enrollment. We’re seeing a lot of consultants that we work with today bring up re-enrollment in their client discussions, and though it is not always an easy conversation I believe it is something that we need to keep pushing to help ensure more participants are invested in their age appropriate asset allocation.
Murray: Plan sponsors have existed in a world where a 401(k) plan is, “I give participants choices, they do it on their own, and that’s my fiduciary responsibility.” Plan sponsors have resisted re-enrollment because they are still on the fence when it comes to believing that they have the capacity to take that control. I think it’s our job as fiduciaries and stewards of plans, to really encourage that this is the right thing to do. There’s still a large education process that we all, as an industry, need to put forth for plan sponsors in that mid-market space, to get them to understand the benefits of re-enrollment.