FAAF/EC – Sure Enough

Asked if their recordkeeper offered the most appropriate target-date solution for their participants, more than a third of plan sponsor respondents to PLANSPONSOR's 2008 Defined Contribution Survey said they were not entirely sure.

Panelists at the 2009 Future of Asset Allocated Funds Conference – East Coast discussed how so many plan sponsors, who presumably did not make their decisions without due process and consideration, are now uncomfortable with the choices they made only a few years ago, and what they can do about it now.

Paul D’aiutolo a consultant at UBS, explained that many plan sponsors have doubts about their target-date funds because they still do not fully understand why they bought them in the first place. Legislation (in the form of the Pension Protection Act, and its admonition to the Department of Labor to flesh out the concept of qualified default investment alternatives, or QDIAs) approved target-date funds to be QDIAs just as the funds were coming into their own in the market place, generating interest from plan sponsors before the funds had much history, or before plan sponsors had access to much information on the funds, D’aiutolo said.  

Shifting Focus

He noted that with the recent market downturn, the focus has not only been on fees and underlying asset allocations, but making sure that plan sponsors really understand the underlying assumptions behind the funds in which they are investing, and that they hope are helping to keep their participants on track for a successful retirement with an adequate retirement income.   However, with the recent market turmoil, those target-date funds are now subject to much closer scrutiny from plan sponsors than when they were originally bought.

Michael Kane, President of Michael M. Kane and Associates, pointed out that very few target-date funds have three or more years of track records behind them. Since the Pension Protection Act (PPA) was passed there have been hundreds of new products that have arrived on the market, he said, and because of this when plan sponsors conduct independent studies to review product performance, they often have difficulties with benchmarking those options.   Without any significant information or track records to create a benchmark, comparison of funds can be confusing, but that information is necessary to make a prudent decision, he said.

Todd Lacey, Managing Partner at the (K)larity Group, said that the concept behind these investment vehicles is "fantastic," and that when target-date funds were introduced they were believed to be an almost perfect solution for the uninvolved, and often ill-informed, participant. Following a similar model to glide paths - becoming more and more conservative as participants near retirement - and doing so at a reasonable price, seemed at the time to be exactly what participants needed. After the market turned, however, has prompted closer scrutiny of these products, how they work, and their underlying funds. Plan sponsors are now questioning what is the best option for their plans, a task which, given the existing economic climate, unfortunately translates to finding out who performed the least badly in the last year and a half.  

Moderator Charles Ruffel, Founder and Director of PLANSPONSOR Magazine, asked panelists whether they anticipated this issue being any less central to the defined contribution business in one year than it is now, or if they expected any meaningful shift of assets away from the entities that dominate the market today. Lacey answered first, predicting a less concentrated interested when performance becomes more positive.

Lacey predicted that as the market recovers there will be less and less attention paid to these topics, but he believed that target-date funds would not only remain important, but that the offerings have a permanent place in defined contribution plan designs going forward. He also predicted that there will be more money moving towards custom-built, open architecture asset allocation and target-date funds, as a greater focus on the underlying manager quality in those funds would become more attractive, with a proprietary-only approach would become less popular.

Kane predicted a greater emphasis on asset allocation in the future, stating that it will remain central to future retirement plan designs. Target-date funds are going to become more competitive in terms of expense ratios, he said, and more of the desired information will become available as companies develop more extensive track records with comparisons can be made. To this end, more studies can and will be conducted, and more funds will be subject to fine-tuning as a result of the downturn we have seen in recent months.

D'aiutolo stated that asset allocation is never going to be as important as it is going forward in the next several months; traditional asset allocation and non-correlating assets did not work in this past environment, and he warned that there will be more pressure to create the right asset allocation, to match assets and liabilities. He stressed the importance of understanding and matching your employee base with the asset allocation funds that are right for them. Past products, he said, were created in a vacuum with old, outdated assumptions; now the retirement plan community has a responsibility to make adjustments to take care of participants.

- Sara Kelly

"Sure" Enough?-How Good Are Your Asset Allocation Choices?

Asked if their recordkeeper offered the most appropriate target-date solution, more than a third of plan sponsor respondents to PLANSPONSOR's 2008 Defined Contribution Survey said they "weren?t sure." How you can assure yourself that yours are.

Moderator:Charles Ruffel , Founder & Director, PLANSPONSOR


Todd Lacey , Managing Partner , The Klarity Group
Michael Kane , President, National Retirement Partners

PaulD'aiutolo , UBS

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