For five years, Janus has partnered with PLANSPONSOR in a
special section of PLANSPONSOR’s annual DC Survey devoted to plan sponsors’
assessment of qualified default investment alternative (QDIA) and target-date
fund (TDF) issues. The survey findings were discussed during a recent webcast
with panelists Russ Shipman, senior vice president and managing director of
Janus Retirement Strategy Group; Toni Brown, partner and senior investment
consultant in Mercer’s San Francisco office; and Karen Bartholow, vice
president of Global Benefits Analysis for News Corp.
PS: When we look at the 2011 survey results, are plan
sponsors’ perspectives about QDIAs consistent with what you’re seeing in the
Toni Brown: The survey supports what we’ve been hearing from
clients. Although TDFs continue to be added to plans on a regular basis, I was
surprised to see that smaller plans had not added them to the extent larger
plans had. We expect to see that market segment grow significantly, going
Karen Bartholow: News Corp.’s peers in the large-plan space
have increased the use of TDFs, and many surveys have shown an increase in
[their] use over the past five to seven years.
Other surveys have also shown a corresponding decrease in
the use of target-risk or balanced funds, and I think part of the reason might
be that, once you’ve added a range of TDFs, it seems redundant to have balanced
funds. At News Corp., we’ve reduced the number of balanced fund offerings. And
in terms of a QDIA, one of the appeals of using a TDF is that it addresses the
changes in risk tolerance that individuals will likely experience as they get
closer to retirement.
Russ Shipman: The most recent survey data and findings are
consistent with the anecdotal stories and ongoing discussions we’re having in
the marketplace, but there is also a mindset shift to “Let’s take a hard look
at our current TDF and really understand what’s driving performance,” and,
importantly, “How will this fund respond in different market environments?” We
also view as fairly significant and notable the survey result showing one of
four plans is still uncertain about picking a QDIA, especially given that we’re
more than a few years past the Pension Protection Act [PPA] of 2006.
PS: Why do you think the survey results show that plan
sponsors view balanced funds as better for low fees and transparencies but TDFs
as better for performance?
Brown: I think plan sponsors are viewing balanced funds as
one fund with a 60/40 allocation. Balanced funds are simpler by design—they
have an asset allocation, and, although they may vary a little bit around that
stated allocation, it’s pretty easy to get your arms around what it is.
Balanced funds are also more transparent because they’re easier to understand
at any given point in time and they have reasonable fees, generally speaking,
in great part because they’re using major asset classes and not overly
But if you’re thinking about performance for the lifetime of
a participant, a TDF makes sense. Certainly, TDFs will have more equity
exposure for a long time before they reach a 60/40 allocation and then ramp
down the equity exposure from there. The higher equity exposure is going to
drive performance in the early to mid years.
We believe that, if there’s an understanding as to how the
TDFs are investing, performance will mirror how one would expect them to
perform. We would suggest that TDF performance has actually held up—even in
2008—when you take asset allocation into account. I’m happy to see that plan
sponsors still think target dates have good performance.