Defined Contribution Consulting Support and Trends Survey

Transcription

1 Your Global Investment Authority Defined Contribution Plans Defined Contribution Consulting Support and Trends Survey 6th Annual Survey Highlights 2012 PIMCO advised funds are distributed by PIMCO Investments LLC. For Investment Professional Use Only Not for Public Distribution

2 PIMCO DC Practice at a Glance PIMCO, founded in 1971, is one of the most respected names in global asset management, due to our long-term performance record, total-return approach, and close attention to client needs. Our PIMCO DC Practice is dedicated to promoting effective DC plan design and innovative retirement solutions. We are among the largest managers of assets in defined contribution plans, offering investment management for stable value, fixed-income, inflation protection, equity and asset allocation strategies such as target-date solutions. We also provide analytic modeling, plus can help plan sponsors identify DC consultant resources. Our team is pleased to support our clients and the broader retirement community by sharing ideas and developments for DC plans in the hopes of fostering a more secure financial future for workers. 2 Survey Highlights Defined Contribution Consulting Support and Trends Survey

3 Participant List Survey Overview: 2012 The PIMCO DC Practice prepared the 2012 Defined Contribution Consulting Support and Trends Survey to help plan sponsors understand the breadth of views and specific consulting services available within the defined contribution (DC) marketplace. This survey captures data, trends and opinions from 39 consulting firms across the U.S., which serve over 3,600 plan sponsors with aggregate DC assets of more than $1.8 trillion as of December 31, This survey provides information on the consulting firms insights on: DC Business, Asset Allocation, Target-date Strategy Support and Plan oversight and core investment trends. Given the ever-increasing dependence on DC plans as the primary source of retirement income, this survey aims to identify how the leaders in DC consulting are helping their clients design and deliver successful plans. 401k Advisors Arnerich Massena & Associates, Inc. Bidart & Ross, Inc. Callan Associates Chepenik Financial Concord Advisory Group Ltd. Curcio Webb, LLC Defined Contribution Advisors, Inc. DiMeo Schneider & Associates, LLC Ellwood Associates FiduciaryVest, LLC Francis Investment Counsel Hewitt EnnisKnupp Independent Fiduciary Services, Inc. Innovest Portfolio Solutions, LLC Institutional Investment Consulting Johnson Custom Strategies, Inc. JPMorgan Performance Analytics & Consulting Group Lockton Financial Advisors, LLC Marco Consulting Group MBM Advisors, Inc. Mercer Investment Consulting, Inc. Mesirow Financial Morgan Stanley Smith Barney Morningstar, Inc. NEPC Plan Sponsor Advisors, LLC Portfolio Evaluations, Inc. Rocaton Investment Advisors, LLC Russell Investment Group Segal Rogerscasey Slocum Snook Housey Advisors Summit Strategies Group Towers Watson UBS Financial Services Wilshire Associates, Inc. Wurts & Associates, Inc.

4 Survey Highlights: 2012 Business items Consulting firms report an increase in their DC client base from an average of 94 clients in 2011 to 110 this year. The majority of clients served by consultants are corporate plan sponsors (71%), followed by not for-profits (13%) and public plans (8%). Firms with dedicated DC teams report over a quarter of their firm s staffing as dedicated to DC, with a median staff size of seven and an average of 22 members, including: Twelve consultants, up from 10 Six analysts, down from seven Four support staff, up from three On average, 45% of firm revenue comes from DC business, the median being 41%. Fastest-growing DC areas reported by consultants (four of the top five the same as 2011 except DC plan design) include: Total plan cost/fee studies DC plan design DC recordkeeping searches Manager selection and monitoring Target-date asset allocation (glide path) creation Target-date and asset allocation strategies Consultants rank evaluation of the glide path structure as most important in selecting or designing target-date strategies. Ninety-seven percent of firms recommend that clients offer a target-date or target-risk investment tier. Sixty-nine percent actively promote custom target-date strategies or support client interest in this area Seventy-four percent believe custom target-date strategies make sense to consider for plans at $500 million or less About a third (29%) of consultants believe a second target-date series or specific vintage may make sense Seventy-eight percent suggest the addition of Treasury Inflation-Protected Securities (TIPS) to reduce risk in asset allocation strategies. Sixty-four percent suggest reducing exposure to risk assets (e.g., equities) as a risk-reduction approach Sixty-five percent believe that tactical asset allocation is a somewhat important to critical component in glide path management Consultants suggest the maximum percentage loss participants can bear is: age 25 = 30%, age 35 = 20 30%, age 45 = 10 20%, age 55 = 5 10%, age 65 = 0 5% 4 Survey Highlights Defined Contribution Consulting Support and Trends Survey

5 Over two-thirds of consultants (71%) believe a custom target-date approach is an improvement over current packaged funds. Almost two-thirds (64%) of firms believe that managed accounts should be an opt-in asset allocation choice only. Aon Hewitt, Schwab, Fidelity, JPMorgan, Wells Fargo, Diversified, Mercer, and ING were noted as the recordkeepers most supportive of custom strategies. Investment Options Half of consultants anticipate future investment returns to be lower, and 71% report that volatility is expected to be higher going forward. Over half (52%) of consultants believe that adding global fixed income strategies may enhance plan sponsors DC equity offerings. Asset classes reported as providing the most value if added to a plan include emerging market equities (67%), commodities (60%), and absolute return (including unconstrained fixed income and equity strategies) (57%). TIPS (43%), emerging-market debt (40%), and global or non-u.s. fixed income (37%) were also mentioned. Consultants report that active management makes the most sense for all asset classes except largecap U.S. equities and TIPS. Notably, the vast majority (89%) believe it is somewhat to very important to actively manage global asset allocation strategies. Consultants (92%) generally suggest a single core lineup, including both active and passive strategies. The majority of consultants believe that the desired way to gain exposure to emerging markets in a DC plan is through a global asset allocation strategy or broad non-u.s. global strategies added to the core. Given concerns about recent litigation and risk in general, the three ways that consultants believe plan sponsors can minimize litigation risk include: Document investment policies and processes Evaluate and confirm reasonable plan investment fees Establish an engaged DC investment oversight committee Seventy-four percent of consultants believe the top factor that may drive discontinuance of stable value funds is insufficient quality wrap capacity. Over two-thirds (68%) cited that plan sponsors moving away from stable value or money market may consider adding short-term strategies tailored for DC participants. Most firms (72%) anticipate some clients to add a retirement income option in the next couple of years. Consultants noted the retirement income options that are most attractive in DC plans are: stable value, diversified income, systematic withdrawal program, and asset allocation with living benefit. Defined Contribution Consulting Support and Trends Survey Survey Highlights 5

6 Survey Details: 2012 Defined Contribution Business The firms continue to experience DC business growth. On average, the firms support 110 clients; the median is 50. This compares to 94 and 70 in 2011, 75 and 48 in 2010, 57 and 35 in 2009, and 49 and 32 in The firms serve clients with DC plan assets totaling almost $49 billion on average and $16 billion at the median. This compares to $59 billion and $20 billion in 2011, $64 billion and $15 billion in 2010, $56 billion and $20 billion in 2009, and $47 billion and $15 billion in The average of the median plan size that firms serve is $259 million, and the median is $122 million. This compares to $414 million and $200 million in A majority of DC clients (71%) fall in the corporate market. The remaining are split among not-for-profit (13%), public (8%), and other (7%) markets. On average, firms are staffed with 72 people: 30 consultants, 26 analysts and 16 support staff. Firms that have a dedicated DC team are staffed, on average, with 22 people: 12 consultants, 6 analysts and 4 support staff. Note: DC dedicated team size is up by two people from 2011 (2 more consultants, 1 fewer analyst, and 1 more support staff). On average, 45% of firm revenue comes from DC business, the median being 41%. On average, consultants are providing custom asset allocation services to a greater number of clients than in Plan sizes for those setting up custom strategies decreased from The median plan size ranges from $46 million to $1.6 billion in 2012 compared to $100 million to $2 billion in The average of the median plan reported also decreased to $676 million in 2012 from $1.5 billion the prior year. Virtually all of the firms surveyed (97%) provide manager selection and monitoring services along with investment policy development/documentation. In addition, most provide total plan cost/fee studies (89%), recordkeeping searches (87%), plan design (84%), guaranteed/annuity product evaluations (82%), balanced/target-risk asset allocation creation (71%), and communication consulting and benefits design (68%). Two-thirds provide ongoing balanced/target-risk management (66%) and ongoing target-date/glide path management (66%). In addition, nearly two-thirds provide target-date asset allocation (glide path) creation (63%), retirement income studies (63%), and discretionary oversight of investment selection and monitoring (58%). When ranking the areas of greatest growth over the past year, over two-thirds of firms (69%) said total plan cost/fee studies was the most common. This is followed by almost half of firms (47%) stating plan design as the most common, then recordkeeping searches (44%), and manager selection and monitoring (42%). Consultants ranked target-date asset allocation (glide path) creation (28%) and investment policy development/documentation (28%) among the remaining top five growth areas. 6 Survey Highlights Defined Contribution Consulting Support and Trends Survey

7 Defined contribution asset allocation and target-date strategy support Over two-thirds (69%) either support client interest or actively promote creating custom target-date strategies. Others (8%) base their views on whether custom is appropriate for the situation based on specific client factors. Almost three-quarters (74%) of firms believe it makes sense for plan sponsors to consider creating their own custom strategies with $500 million or less. Only 8% of firms believe $1 billion or more in plan assets is needed for custom. The results were virtually the same in Consultants believe the top three reasons plan sponsors may not implement custom strategies are (1) difficulty of operational setup, (2) time required to implement, and (3) fear of liability, insufficient asset size and asset allocation setup and oversight is too demanding. In 2011, the top three reasons were (1) difficulty of operational setup, (2) insufficient asset size, and (3) fear of liability. The majority of firms (79%) are willing to serve as 3(21) non-discretionary advisor, followed by 64% of firms willing to accept 3(38) discretion over manager selection, and 56% willing to accept 3(38) discretion over glide path. Half of firms (50%) anticipate lower capital market returns in the future. Almost one-third (29%) are anticipating similar future returns. Notably, no firms are anticipating higher investment returns going forward. In 2011, the results were 64% and 29%, respectively. The majority (71%) of consultants anticipate higher future volatility, whereas 16% are anticipating similar future volatility. Notably, no firms are anticipating lower volatility going forward. In 2011, the results were 54% and 39%, respectfully. Consultants generally agree that non-u.s. markets will generate higher returns for both fixed income and equities. Consultants expect global asset allocation to return 6.5%. An increasing percentage of consultants (65%) believe that tactical asset allocation is a critical to somewhat important component of glide path management. Only about a third (35%) of firms said that tactical asset allocation is not important. In 2011, the results were 55% and 44%, respectively. The majority of consultants (78%) believe that investing in TIPS is the best risk mitigation approach within asset allocation strategies. Nearly two-thirds of consultants (64%) recommend reducing exposure to assets with highly uncertain outcomes. The results in 2011 were 86% and 71%, respectively. 7

8 Survey Details: 2012 Nearly two-thirds of firms (61%) believe that re-enrollment will be somewhat to very common in the future, while slightly over one-third (36%) believe it will not be very common. These results are similar to The most common recordkeeping approach used to support custom strategies is the model portfolio method (51%) (i.e., preset allocation on recordkeeping system), followed by the trust portfolio approach (38%) (i.e., funded trust account). In 2011, the most common approach was the trust portfolio (50%), followed by the model portfolio (36%). A long list of recordkeeping firms has been used to establish custom target-date strategies. The top eight firms noted by consultants as supportive of custom strategies include Aon Hewitt, Fidelity, JPMorgan, Diversified, Schwab, Wells Fargo, Mercer, and ING. This list is virtually the same as in 2011 with the exception of Diversified. One-third of consultants believe that target-date or target-risk strategies that use a multimanager lineup of passive and active approaches will be selected most often by plan sponsors. This has decreased compared to results from previous years. Single manager passive and single manager active are noted as following multimanager strategies in expected selection. While consultants anticipate multimanager strategies to be selected most frequently, they note that the most common target-date approach being used today by clients is single manager active (40%). This is followed by single manager passive (21%) and multimanager passive and active (18%). The results in 2011 were 39% for single manager active, 35% for multimanager, and 27% for single manager passive. In order of importance, consultants report that plan sponsors consider these factors as they evaluate target-date or target-risk strategies: (1) glide path structure, (2) fees, (3) active vs. passive, (4) breadth of underlying investment, and (5) performance. This compares to the 2011 ranking of (1) glide path, (2) fees, (3) active vs. passive, (4) return volatility, and (5) breadth of underlying investments. Consultants report the following as the most common approaches to benchmark target-date or target risk strategies: (1) peer group comparison, (2) investment manager index composite, and (3) consultant-created index composite. Almost two-thirds (65%) of consultants feel that current glide paths are somewhat to highly appropriate, whereas over one-third (35%) believe that current glide paths are somewhat to highly inappropriate (i.e., too aggressive). These results are consistent with Over three-quarters (78%) of consultants believe that the allocation to risk assets (e.g., equities) for those at retirement age (e.g., 65) should not exceed 40%. Almost a third of consultants (32%) believe that the glide path should reach its lowest risk allocation (e.g., equities) between the ages of 71 and 75. Just over a quarter (26%) of consultants believe the lowest risk should be reached earlier, between ages 66 and 70. Notably, 16% of consultants cited other factors, such as demographics and retirement age, as driving factors. 8 Survey Highlights Defined Contribution Consulting Support and Trends Survey

9 There is general consensus among consultants when it comes to loss tolerance for participants at different ages. Almost all consultants cited a loss tolerance of more than 30% at age 25, up to 30% at age 35, up to 20% at age 45, up to 10% at age 55, and between 0% and 5% at the age of 65. Over two-thirds (71%) of consultants believe that a custom approach to target-date funds would improve current packaged products. Less than a quarter (21%) believe there is plenty of choice among current packaged target-date funds. Over half (59%) of consultants believe that it would not make sense to offer more than one set of target-date strategies. About a third (29%) believe a second target-date vintage or series may make sense. Plan oversight and core investment trends In order of importance, the three most important ways that consultants believe plan sponsors can minimize litigation risk include (1) document investment policies and processes, (2) evaluate and confirm reasonable plan investment fees, and (3) establish an engaged DC investment oversight committee. Consultants believe that the most common action will be evaluating underlying investment management of stable value, while over half anticipate no action, as plan sponsors are happy with their current option. These results are virtually the same as the prior year. Over three-quarters (79%) of consultants cited that clients may consider moving to a money market option (for those that terminate stable value). Over two-thirds (68%) cited that plan sponsors may consider adding a short-term fund tailored for DC participants (i.e., tighter guidelines, less volatility). Notably, almost half (43%) cited adding stable value as an option for those plan sponsors that terminated money market options Nearly three-quarters (74%) believe that the top factor which may drive discontinuance of stable value funds by some plan sponsors is insufficient quality wrap capacity. Almost two-thirds (65%) believe that overly restrictive wrap agreements may drive stable value discontinuance, and over a third (39%) believe that higher stable value wrap fees will be the third most common driver of change. 9

10 Survey Details: 2012 Almost two-thirds (64%) of firms believe that managed accounts should be an opt-in asset allocation choice only, whereas only 15% believe that managed accounts should be an opt-out investment default (plus opt-in choice). Notably, five firms (13%) believe managed accounts have no role in a DC plan. The majority of consultants believe that active management makes sense for all asset classes except large-cap U.S. equities and TIPS. Consultants report that the most important asset classes to actively manage are non-u.s. bonds, emerging-market equities, and global asset allocation strategies. Nearly all (90%) consultants believe that lower cost is the most common factor driving interest in passive investing followed by legal concerns (57%) and communication simplicity (47%). Nearly all firms (97%) recommend that clients offer a target-date or target-risk investment tier, and 92% suggest that a core fund tier (with both active and passive investment choices) be provided. Sixty-eight percent suggest a brokerage window, with the majority recommending mutual funds only. The vast majority do not recommend a separate investment tier for passive only or active only. The results were almost identical in Firms believe that emerging-markets equity (67%), followed by commodities (60%) and then absolute return (including unconstrained equity and fixed income) (57%) would bring the most value as added asset classes within the core or as an addition to an asset allocation strategy. In 2011 and 2010, firms rated TIPS, emerging-markets equity, and commodities as the top three needed asset classes. Over half (52%) of consultants believe that adding global fixed income strategies may enhance plan sponsors DC equity offerings. Almost half (48%) believe that adding global equity and non-u.s. (emerging market) strategies may enhance DC equity offerings, while close to half (45%) suggest that combining equity styles (value and growth) may help. Nearly a third of consultants (29%) suggest adding a global unconstrained strategy. The majority of consultants (71%) believe that the desired way to gain exposure to emerging markets in a DC plan is through a global asset allocation strategy (e.g., target-date). Over two-thirds (68%) believe that exposure may best be gained through a broad non-u.s. global strategy that is added to the core, while half (50%) suggest that a stand-alone emerging-markets equity option be added to the core. Almost two-thirds (62%) of consultants believe that plan sponsors prefer retaining retired participants assets in their plans. Only six firms (15%) reported that the majority of their clients prefer that retirees move out of their plan. In 2011, the results were 78% and 7%, respectively. Nearly two-thirds (62%) of consultants believe that clients are unlikely to add deemed IRAs at this time, as they have not discussed them. Over a quarter (26%) are unsure and need to learn more about deemed IRAs. In 2011, the results were 46% and 21%, respectively. 10 Survey Highlights Defined Contribution Consulting Support and Trends Survey

11 The majority of consultant firms (72%) believe that over the next two years it is somewhat likely to highly likely that at least some clients will add a retirement income investment option to their DC plans. Twentyeight percent believe it is unlikely. The results from 2011, 2010, and 2009 were 85%:15%, 80%:20% and 78%:22%, respectively. Consultants said that retirement income products most likely to attract client interest are stable value, diversified income, and a systematic withdrawal program. Results in 2011 included target-date mutual funds with a deferred fixed income annuity, managed payout mutual funds with a longevity insurance annuity, and immediate fixed income annuities. Consultants primary concerns with offering in-plan annuity products include transparency, insurance company default risk, cost, and portability. These results are virtually the same as those reported in 2011, 2010, and

12 About PIMCO and Our DC Practice Based in Newport Beach, California, PIMCO is a global investment management firm with over 1,400 dedicated professionals focusing on a single mission: to manage risks and deliver returns for our clients. For four decades, we have managed the retirement and investment assets for a wide range of investors, including corporations, governments, not-for-profits, and other organizations, as well as for individuals around the globe. As of December 31, 2011 our: Clients include more than half the Fortune 100 Investment professionals on staff exceed 600 Global presence includes offices in 12 locations Total assets under management exceed $1.3 trillion DC assets under management nearly $174 billion If you have any questions about PIMCO, the DC Practice or this survey, please contact your PIMCO representative or us at [email protected]. 1 Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc). Generally, older participants and eligible retirees have shorter time horizon to retirement and their investment risk level declines as preserving income wealth becomes more important. 2 PIMCO does not issue or sell annuities or other insurance products or products that combine securities and insurance features. This material is provided for information purposes and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction. A word about risk: All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Stable value wrap contracts are subject to credit and management risk. Exchange Traded Funds ( ETF ) are afforded certain exemptions from the Investment Company Act. The exemptions allow, among other things, for individual shares to trade on the secondary market. Individual shares cannot be directly purchased from or redeemed by the ETF. Purchases and redemptions directly with ETFs are only accomplished through creation unit aggregations or baskets of shares. Shares of an ETF are bought and sold at market price (not NAV). Brokerage commissions will reduce returns. Investment policies, management fees and other information can be found in the individual ETF s prospectus. The survey results contain the opinions of the respondents but not necessarily those of PIMCO. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. 2012, PIMCO. PIMCO advised funds are distributed by PIMCO Investments LLC. For Investment Professional Use Only- Not for Public Distribution Newport Beach Headquarters 840 Newport Center Drive Newport Beach, CA Amsterdam Hong Kong London Milan Munich New York Singapore Sydney Tokyo Toronto Zurich pimco.com/investments PDCSH001_32034