When it comes to DC investment issues, plan sponsors need to think about their members first. That was the message Marcus Turner of Towers Watson stressed yesterday at the ACPM’s Ontario Regional Council spring session—The New Normal for Investments and Other Updates—in Toronto.
“Everything’s going to come back to understanding your membership,” he said. “Don’t lose sight of this.”
Turner began with a brief overview of the three types of DC plan members—self-selectors, guided selectors and true defaulters—and then followed up with a review of some of the DC investment issues plan sponsors need to consider.
The default option: TDFs
Many DC plan sponsors are turning to target date funds (TDFs) as the default option, Turner began. According to Towers Watson’s 2010 DC Survey, of the 46% of plan sponsors that were considering changing their default fund, 66% said they would change it to a TDF.
TDFs should take into account the needs of the particular plan and its members (e.g., plan members’ risk tolerance, other sources of retirement income, contribution rates and employer match), he said.
However, there tends to be a belief out there that TDFs offer a “set it and forget it” approach.
“TDFs certainly have some very attractive characteristics; however, it’s important to assess their value within the context of your members’ unique profile and evaluate how they will contribute to their overall retirement income,” said Turner.
What are the chances, Turner asked the audience, that a member is going to outlive his or her assets? TDFs are a good option, but you still have to use them appropriately and figure out how they will work into your members’ retirement.
Active versus passive
Active versus passive investing is another issue DC plan sponsors wrestle with.
In terms of passive investment, Turner pointed out that several events in the last 10 years have shown investors the risks inherent in equity indexes. For example, even the largest organizations in the main benchmark indexes aren’t immune from financial disasters (think Lehman Brothers).
Active investing, on the other hand, may be “more material in a lower-return environment.” But while recordkeepers now have a wider selection of active investment offerings available, the “depth of some platforms can be disappointing.” For example, what is a recordkeeper’s objectivity on the inclusion or exclusion of an investment manager?
Global diversification
Global diversification is another issue. Again, recordkeepers have numerous global offerings these days, and the availability of U.S., international and global equity managers has increased in the past 10 years. However, high-quality managers can still be difficult to access, Turner cautioned. Just like active/passive investing, there’s still the question of the recordkeeper’s objectivity on the inclusion or exclusion of certain U.S., international and global managers.
Alternative assets
Theoretically, alternative assets, according to Turner, can be useful in a portfolio because they diversify risk by investing in different asset classes; however, there are some very real practical considerations that must be addressed before these assets are offered to DC plan members.
“They can’t but help improve the risk in the overall portfolio.”
Although some DC plan sponsors offer real estate exposure (and there has been infrastructure options listed on some platforms in the U.S.), there has been little take-up on alternatives in the DC world as the trend seems to be more toward simplification, he continued.
In DB plans, plan sponsors offer alternative investments all the time. But getting plan members to understand and make informed selections on alternatives is a challenge.
“Can members correctly assess the risk profile of a managed futures mandate?” he asked.
While there are many issues for the DC plan sponsor, Turner suggested the audience to remember the following: “Where are my members today, how sophisticated are they and, when I put the pieces together, how can I wrap it up into a neat little bow and present it to them?”