DC plan consultants expect that future markets will be as volatile as they have been in the recent past, and offer lower returns. That’s why they view asset diversification and custom target-date strategies as key elements to successful defined contribution schemes for retirement income planning, according to plan consultants that the Pacific Investment Management Co. surveyed last December and January.
PIMCO surveyed 29 DC consulting firms that serve almost 2,500 clients whose DC assets total more than $1.5 trillion. A whopping majority of consultants, 86%, suggest using Treasury inflation-protected securities as a way to reduce risk in asset allocation strategies.
Consultants also said that active management makes the most sense for all asset classes, except large-cap U.S. equities. “Most would agree that the information flow in the large-cap equity market is the greatest and the best honed,” says Stacy Schaus, PIMCO’s senior vice president and head of its defined contribution practice. “You can say the large-cap market has the most efficiency.”
Investment areas where active management had the most value were markets that were less liquid, transparent or that had a lot of other issues that presented opportunities to generate alpha returns, Schaus added. Specifically, emerging-market equity, non-U.S. bonds and small-cap U.S. equities were the two top asset classes where active management did the most good.
Much of the survey dealt with best practices for designing and managing target-date strategies. As Schaus mentioned, half of all companies in the U.S., particularly ones with defined contribution plans, enroll participants in target-date plans. The question becomes which ones are the most appropriate.
“Most of the major firms have a fund, but on what basis do you compare and contrast, and what is the most important feature in those plans?” Schaus says. “Many consultants in the survey said it’s the glide path allocation within them — rather than fees, performance or passive or active underlying options — which we agree with completely.” The glide path focuses on how much overall risk is within the asset allocation, in relation to meeting the retirement income goal.
When it comes to custom strategy services, 82% of survey respondents provide underlying manager selection, 75% offer glide path creation, and 79% do glide path implementation. Half of the surveyed consultants actively promote custom target-date strategies, and one quarter of respondents are neutral in their support.
Mitchell is a senior editor at Financial Planning magazine, a SourceMedia publication.
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