Ahmed: When I think about why we’ve been successful in the retirement space and why we’re a leader, I think a lot of it comes down to the attributes of the organization, of Franklin Templeton itself. I think about what advisers and consultants, sponsors and even plan participants may be looking for, and I think about our strengths—the financial strength, the depth and breadth of our product, the stability of the organization, and even the structure of Franklin Templeton. I think that’s important. We’re a pure investment management organization. We don’t own recordkeeping, we’re not owned by a bank or an insurance company. Our focus is singular, and that’s investment management.
We’ve experienced consistent returns over the last 65 years, with strong long-term performance over all economic cycles. That translates really well over to the defined contribution (DC) plan and retirement space.
If you look at our total assets today, we have close to $900 billion in assets under management (AUM). About 20% of that is exclusively around retirement. Our CEO, Greg Johnson, will tell you that one of the most important aspects of our firm has always been helping investors save for retirement. We’re backed by our credit ratings, Standard & Poor’s (S&P) credit ratings, which are the highest of any investment manager. Again, those are all important qualities and attributes for an investment manager that’s caring for your retirement assets.
I think in terms of the DC space, we’ve seen significant growth and momentum. We’ve established a strong group of retirement sales and service people, we’ve developed our marketing, thought leadership, practice management and tools to help support retirement advisers. We see them as central to the retirement plan equation. It’s really important that we have the right support structure.
Today, we have about 20 retirement investment-only specialists that work both with providers on the key account side, as well as retirement specialists, the advisers and consultants themselves. All of these folks are very seasoned, they’re experienced, they have a lot of industry experience both on the recordkeeping side and the investment side. I think those are the two things that you need to balance to have an effective sales and service person, someone that understands the institutional retirement space coupled with strong investment acumen.
Frankly, the big thing that I look for is a sense of passion for this business, for this industry, for what we do and why we do it. I think if you have all of that, it’s a recipe for success, and advisers see that. It’s a reason why we’re a leader in this space.
PA: Can you tell me a little bit more about your approach to working with retirement plan advisers?
Ahmed: First and foremost, we don’t pretend to think that we have the answer for every adviser and every sponsor. We did relaunch our LifeSmart target-date funds (TDFs) about a year ago. We’ve greatly enhanced them, but I think what’s really important is that we looked at the front end of that process. Now, in early 2013, the Department of Labor (DOL) came out with some tips for fiduciaries. That, for us, led us down a road where we needed to equip advisers to have that conversation around due diligence and the governance of target-date funds as a result of their growth. They’re growing astronomically fast. It’s about 10% of DC plan assets today, but most of every new dollar is going into target-date funds, hence the size, the scrutiny and the additional governance required for target-date funds. We think we have the right tools to help advisers have those conversations with sponsors.
As it relates to the actual target-date funds themselves, we do feel that there’s a missed opportunity in the way these are structured. I truly believe that these should be multi-asset, fully diversified portfolios. When you think about the average investors in a 401(k) plan, it may be their first time investing in the stock market. You want a vehicle and a product that simplifies the process and gives them a diversified portfolio, includes things like global fixed income, global equity, includes alternatives. That really can help the risk/return profile for defined contribution participants.
You don’t have to look very far to see studies where more institutional-type accounts—whether it’s endowments, foundations or defined benefit (DB) plans—have outperformed defined contribution plans with less risk. In fact, I saw a recent study where they did that even against target-date funds, which tells me that most target-date funds today aren’t fully diversified. I think there’s an opportunity to improve the risk/return profiles for target-date funds.
A key to executing on this is working with an asset manager that has a broad, diversified global investment platform and integrated risk management with the expertise in creating innovative multi-asset solutions.