Top DC Sponsor Concerns: Safety and Inflation

More than a third of consultants said sponsors are planning to revisit the glide path of target-date funds, according to a survey by PIMCO.

Sponsors are typically looking to make the glide path more conservative and better diversified, according to a PIMCO news release about its survey results. Furthermore, consultants are helping DC plans offer investment options that focus on minimizing the risk of losses, with 61% expecting plans to add Treasury or government-only money market funds.

In the same vein, according to the news announcement, 61% of consultants said they are helping evaluate DC plans’ existing stable value offerings by studying the underlying manager performance.

“Given the extreme market volatility and significant decline in DC account balances over the past year, it’s not surprising that DC plan sponsors are focused on reducing the risk that participants face in their DC plans,” said Stacy Schaus, senior vice president and PIMCO’s Defined Contribution Practice leader, in the news release. “Consultants are helping clients evaluate their DC plan investment structures, often to dial down risk and improve the likelihood that the plans will meet participants retirement income goals.”

Inflation Risk

At the same time, though, PIMCO finds that consultants are also working with clients to assess volatility and inflation risk in their plans. They report that plan sponsors are adding asset classes that increase diversification and help hedge against a rising inflationary environment.

All of the consulting firms in the poll agree inflation protection is somewhat important to critical in DC plans, and they ranked Treasury Inflation-Protected Securities (TIPS), commodities, and real estate investment trusts (REITs) as the top three asset classes for doing so, PIMCO said.

Target-Date Growth

Some 35% of consultants note that plan sponsors are reconsidering or revising the asset allocation, or “glide path,” in their target-date offerings. PIMCO said consultants believe target-date strategies will continue to be the preferred investment default for DC plans, and two-thirds of consultants are actively promoting custom target-date strategies.

More than three-quarters (76%) of consultants offer custom target-date asset allocation services for clients, and they support custom strategies for plans of all sizes, from $1.3 million to multi-billions.

Other findings from the survey include:

  • 94% of consultants believe target-date strategies will continue to be the most prevalent form of investment default in DC plans;
  • 78% believe that DC plan sponsors expect to add guaranteed income products over the next two years;
  • 59% of consulting firms have a dedicated DC team, with a median of five consultants, four analysts, and one support person—an increase of one person from 2008.

The 2009 Defined Contribution Consulting Support and Trends Survey covered 32 consulting firms across the U.S. that collectively serve more than 1,400 clients with aggregate DC assets of nearly $1.6 trillion.