In its report, “DC Plan Investments: A Path to Improve Long-Term Outcomes,” Towers Watson notes that in DB plans, a single asset pool and flexibility in handling portfolio liquidity allows plan sponsors to diversify investment exposures across many strategies, including some that benefit from a substantial liquidity premium. As a result, many plan sponsors have reduced total plan volatility without compromising the level of return.
In addition, the larger asset base also supports lower fees through sliding fee schedules and lower-cost vehicles. Lower fees are accessible to larger asset pools primarily due to the scalable nature of investment management, as well as custodial and administrative systems. These advantages could clearly also benefit DC plan participants, Towers Watson contends.The report notes that with the recent growth in target-date funds, which hold investments based on a target retirement date, and pooling of strategies in these funds, the traditional benefits of asset pooling are now becoming increasingly available.
However, according to the report, before further improvements can happen, regulations and the emphasis on the perceived benefits of daily valuation and daily liquidity need to reflect something more akin to global best practices.
Most DC plans currently provide participants access to daily liquidity, should they request it. As a result, all plan options must be priced daily, inhibiting the use of less liquid strategies (such as hedge funds, real estate and private equity). Towers Watson says this inhibition is unfortunate, as these relatively illiquid strategies could improve the investment efficiency of most portfolios.
The report suggests regulators should recognize the benefits of long-term investments and work to remove ambiguity and perceived fiduciary concerns in certain areas—including daily pricing, liquidity, fees and reporting.The report can be downloaded from here.