FAAF/EC – Success Stories

Despite the range and variety of target-date funds now available in the market, only a few have found real success.

Panelists at the PLANSPONSOR’s 2009 Future of Asset Allocated Funds Conference – East Coast discussed the factors behind that result and the changes that can be expected in the near future.

James Sia, Director of Defined Contribution Business Development at Wellington Management Company, noted the changes auto-enrollment and auto-escalation have wrought on the defined contribution marketplace; he anticipates average deferral rates to double and participation rates to rise from a little more than half to roughly ninety percent. Default plans have become much more important, and he predicted a concentration of assets in future investment plans.

Sia urged plan sponsors to reconsider their existing processes and make prudent decisions as fiduciaries, and noted that planning out their investment lineup before hiring a recordkeeper should increase participant satisfaction and provide adequate support for more customized plan portfolios. Because there is a concentration of assets in target-date funds, he said, the real change is the transition away from participant direction toward plan sponsor or investment manager direction, a smart move he said, in view of the realty that participant education does not usually expect competent portfolio managers as its result.

Redirecting Education

Instead, Sia recommended education dollars be redirected to something more manageable, such as teaching participants how to be good savers. If they can learn to save early, save often, to not take out loans unless absolutely necessary, and to treat their retirement plan as the future source of their primary income, they are likely to be much better motivated in their plans, and therefore better prepared at the time of retirement.

Epco Van Der Lende, Managing Director of the Global Portfolio Solutions Team at Van Kampen Investments, anticipates a trend toward the addition of asset classes to reflect the situation that already exists in defined benefit plans. He mentioned an often-neglected aspect of the defined contribution market, adding that the more sophisticated techniques and tools should be applied to the glide path construction that underlies many target-date funds. The dominant factor of long-term returns is the underlying investment strategy, he said, making good return rates very difficult if that strategy is wrong.    Van Der Lende suggested bringing in tools – such as asset liability management techniques – that are currently employed in the pension and institutional worlds.

By focusing on return, asset-only characteristics that underlie the current glide path constructions will be replaced with a much more targeted benefit situation, rather than a defined benefit plan, he said.   Such a plan would have all the good characteristics of defined benefit plans, but with the risk shifted toward participants and with the same type of objective in mind, namely an acceptable and appropriate replacement ratio for participants. He claimed that all glide paths and investment strategies have a certain perception of risk underlying their construction, and it does not make sense to have a perception of risk if it is not related to the objective of the system itself. If the object is replacement income, not return as such, that is what the risk-based approach should grow into, he said, and that requires techniques that are currently underutilized in this marketplace.

Chris Karam, Managing Director at Sheridan Road Financial, tried to give the audience some perspective on the matter, saying, " In terms of the retail mutual fund space, as of December 31st 2008 there were only eleven retail mutual fund providers that had a five-year track record in the space or longer. That number, over time, has grown to thirty-six providers with an eighteen-month track record."

The universe of money managers and service providers in this marketplace is growing dramatically, the types of underlying investments in these target-date products is growing as well into the more non-core asset classes, Karam noted.   The marketplace is changing, he claimed, and that may help to drift some of the competition to new or different providers that have not yet collected the market share as some of the bigger players have to date. He anticipates the emergence of more open-architecture managers, perhaps even an open-architecture array of insurance carriers, moving away from just proprietary products as the growth in managed payout funds helps with the distribution phase. He added that an ex-insurance provider might insure a 2020 fund differently than the managed payout of a 2030 or 2040 fund.

Asked why, with so many options available, only a few companies are in control of the majority of assets, Sia described the influence recordkeepers can have on this decision. In the past, he said, plan sponsors most often would make their decision about target-date funds based on offerings from the recordkeeper they had in place. With more and more consultants in the defined contribution marketplace moving forward, however, plan sponsors are likely to start picking their investments first and then hiring recordkeepers that can accommodate their choices.

Karam explained that plan sponsors are drawn to short-term performance, especially in times like the recent market cycle.   That interest, he said, will filter interest to a select few providers. The track record is critical, as plan sponsors look at fees over time and are usually unwilling to pay very much for these services. He added that time will likely bring other good solutions to the forefront, but decisions will always have a base in the demographics of an employer's workforce and the level of sophistication of those employees.

Now it is not uncommon to see plan sponsors taking a second look at the managers they originally chose - perhaps for reasons that are not longer valid - and considering other options. There is a common theme among plan sponsors of re-evaluating their product provider and their existing target-date solutions to see if there isn't another more appropriate choice for them in the marketplace, he noted.

- Sara Kelly

Success Stories-The "Secrets" of Successful Asset Allocation Solutions

Despite the phenomenal growth rate in target-date fund solutions, a mere handful currently dominates the market. The factors behind that result-and how it's getting ready to change.

Moderator:Nevin Adams , Editor-in-Chief, PLANSPONSOR and PLANSPONSOR.com


Chris Karam , Managing Director , Sheridan Road Financial
James A. Sia , Director of Defined Contribution Business Development , Wellington Management Company
Epco Van Der Lende , Ph.D., Managing Director , Global Portfolio Solutions Team, Van Kampen Investments

Click here to download!
Click here to stream!