Active management is still the favored investment approach for most major asset classes and target-date retirement strategies, according to the 10th annual PIMCO Defined Contribution Consulting Support and Trends Survey.
PIMCO surveyed 66 consultant firms, which advise on more than $4.2 trillion in defined contribution (DC) plan assets. More than three-quarters of those surveyed said active management is very important or important for U.S. and global bonds; emerging market and other non-U.S. equity; and U.S. small cap stocks. Just fewer than one-quarter of retirement plan consultants said it’s important for U.S. large cap equities. Consultants recommend that plan sponsors diversify retirement portfolios and complement core bonds with allocations to investment grade credit, high yield, multi-sector and foreign bonds within the core menu and/or custom/white label strategies.
The survey found that meeting participant income goals for retirement is plan sponsors’ most important consideration. Consultants suggest targeting overall income replacement of 80% of final pay, and three-quarters of that may need to come from defined contribution plans.
“To achieve that goal, consultants are seeking investment management that will deliver sufficient returns and help manage risk,” says Stacy Schaus, executive vice president and author of the survey. “This includes adding diversifying bonds and tapping into active management.”
Most consulting firms also recommend target-date funds (TDFs) as a retirement plan’s qualified default investment alternative (QDIA). They also rank “maximizing asset returns while minimizing volatility relative to the retirement liability” as the most important objective in glide path design. Consultant firms report total assets under advisement within custom target-date, custom target-risk and custom multi-manager/white label of $195 billion, $39 billion and $333 billion, respectively. They expect growth of 8% to 10% over the next three years.
NEXT: Managing fiduciary risk To manage fiduciary risk, survey respondents recommend that plan sponsors benchmark plan costs, hire an investment consultant, document investment reviews, conduct fiduciary training and move away from revenue sharing. Most of those surveyed did not suggest including index funds.
Sixty-three percent of consultants said they are likely to recommend a capital preservation alternative to clients invested in a nongovernment money market fund. Sixty-five percent recommend switching to stable-value funds, while 44% suggest a government money market, and half are at least somewhat apt to recommend an ultra-short fixed-income option or one tailored for DC plans.
About two-thirds of consultants also recommend adding Treasury inflation-protected securities (TIPS) and/or a multi-real asset strategy to the core lineup. Most suggest commodities (84%) and real estate investment trusts (REITs) (82%) be added to blended strategies in addition to a multi-real asset strategy and TIPS.