PA: James, where do you see the industry moving, and what are the big challenges for plan advisers right now?
James Macey: Those things are certainly on my mind as a target-date portfolio manager. I think the volatility we’ve seen recently is here to stay. Participants and advisers are concerned about the market performance we’ve seen this year. Many participants in 401(k) plans look at how the S&P [Standard & Poor’s] 500 was up 32% last year and scratch their heads, wondering why they’re not getting the performance they had.
From my conversations with advisers and plan sponsors, I think we are seeing a shift from “home”-buyers’ target-date funds [TDFs]—by that I mean high allocations to U.S. equities and fixed income. Diversification is something that’s resonating now, from the adviser’s perspective and also the participant’s—the idea of not putting all your eggs in one basket is really playing out. The prospect of rising interest rates is causing many advisers and participants to be concerned. From my perspective, a diversified approach in this type of environment certainly makes more sense.
PA: Why such a rapid shift in the migration to target-date funds?
Macey: After 2008, when many investors were too focused in U.S. equities and their 401(k), there was really a need, a demand, a desire to diversify the mix of asset classes. Most people don’t have the time, energy or expertise to pick their managers or asset classes they could count on to guarantee their retirement future. So, you’ve seen a lot of assets move toward target-date funds as a way to gain very cheap exposure to a large number of asset classes.
There are many things to consider when you’re selecting a target-date fund, for both the adviser and plan sponsor. There are disagreements in the industry concerning the use of “to” funds and “through” funds, in terms of the equity allocation you have at retirement, the shape of the glide path.
Another thing to think about when selecting a target-date fund: How tactical is the manager? Can it use exchange-traded funds [ETFs]? Is it proprietary versus nonproprietary? And so on. Fees are an important consideration. And, certainly from where we sit, using alternatives would be something else that provides diversification.
PA: What can plan advisers do to help participants have a better outcome in retirement?
Macey: Advisers have been doing a great job of helping investors increase their savings rate, because savings rate is the only thing that can guarantee the investor enters retirement with enough put away. So tools such as automatic enrollment and auto-escalation, which are designed to help that participant save more for retirement, are critical here.
As a target-date portfolio manager, I see my job as easy, relative to the enormous task put on advisers and investment committees, on plan sponsors, in selecting target-date managers given the huge depth and breadth across that group. The main point here is that savings rate is critical and the role of the adviser and the consultant has never been more important to help the investment committee both increase that rate for its participants and pick the right target-date manager.
PA: James, what trends will impact our business the most over the next several years?
Macey: We’ve had very low interest rates for a significant period of time, but the prospect of rising interest rates is on everyone’s mind right now. Coupled with that is trying to get income and yield. An adviser’s role is extremely important in making sure that, from a target-date perspective, an investor doesn’t have too much intermediate, broad U.S. fixed-income exposure, that he diversifies and, perhaps, allocates to asset classes uncorrelated with rising interest rates. But I think, in the future when rates rise, investors will be looking for yield, and that’s something that will be on everyone’s mind.