Plan sponsors can maximize their defined contribution retirement plans by adding investment menu options for retired participants and workers who are nearing retirement, according to sources.
Plan design evolutions and attendant changes in participant use since the Pension Protection Act of 2006 “should transform how plan sponsors are thinking about the [investment] menu,” offered to participants, says Jeremy Stempien, principal, portfolio manager and strategist at PGIM DC Solutions.
Participants who are invested in a target-date fund and nearing retirement, for example, can have their asset allocations automatically de-risked to become more conservative as they age, from riskier equities into less risky fixed-income investments.
“The traditional asset classes still are key components—U.S. equities, non-U.S. equities, core bonds, short duration, fixed income or cash—those are on menus and they still apply to what’s really an important aspect for those older individuals or retirees,” Stempien says. “But beyond that, where we see a substantial gap in plan menus today in order to serve those same constituents,” is options to address retirement risks.
He doesn’t advise that plan sponsors ditch equities for participants who are near retirement, but instead that employers address what needs to be tweaked or added, to ensure that older workers can build retirement-centric portfolios and achieve better outcomes for lifetime income through retirement to account for longevity risk.
For example, plan sponsors should consider adding liquid and illiquid asset classes to investment menus to help the cohort, Stempien explains. Investment menus for the retired and near-retired can be bolstered with Treasury inflation-protected securities, also known as TIPs; commodities; real assets; and longer-duration bonds, he says.
Illiquid options could fit within a professionally managed portfolio or managed account option outside of the core TDF menu, he adds.
“[Asset classes] like real estate, private debt and private equity can be considered,” Stempien says. “In a managed portfolio design for retirees, [those] can play more of a role.”
Adding investment options that are noncorrelated to equities, such as real asset funds, are a sound offering for retirees and near-retires. The assets don’t correlate to the stock or bond market, says Chuck Williams, CEO at Finspire, a Chicago-based corporate retirement planning consultant.
“That’s going to be important to have that diversification in retirement,” he adds.
Plan sponsors have been wary of adding so many options as to be confusing to participants, Stempien says, and studies have shown that the growth of plan assets in TDFs may be reducing the importance of investment options on the core menu.
“Most of the accepted DC research out there doesn’t really account for DC investor profiles today,” he says. “The research that’s out there tends to say that larger menus with more options lead to inappropriate participant allocations because participants don’t know how to use them, but what’s missing there is that with the rise of target-date funds and really of the QDIA [qualified default investment alternative], that’s not as much of a concern today, as the number of people self-allocating has decreased substantially.”
Previous research has also shown that plan sponsors are encouraging retiring participants to keep their assets in the plan. But despite that push to remain in-plan, many investment menus have limited options for the retired and near-retired cohort, Josh Cohen, PGIM head of DC client solutions, previously said.
“When we look at what’s typically on a menu versus what’s needed for retirement income, most menus are short on options such as additional fixed-income options, longer duration, more inflation-sensitive asset classes and income-producing asset classes such as commodities, real assets and real estate,” he explained.
Another problem for older workers is that many plan investment menus are tailored toward equity growth options, with an average of three equity funds to each bond option, Stempien says. He says plan sponsors should therefore examine the plan investment menu for inefficiencies. A plan with several U.S. equity options could be culled down, for instance.
“Plans should be very intentional in terms of the coverage [of asset classes] that they provide,” he says. “[It’s] condensing a variety of international equity funds down to one or two, and then giving some more attention to the asset classes that are lacking. It doesn’t necessarily mean menus have to get bigger, just that plan sponsors from a plan design perspective should be thinking about how to make them smarter and more efficient.”
Participant Base
Plan sponsors must give a close examination to their retired and near-retired participants to determine how to structure the investment menu or what needs to be added, says Stempien. He says it’s important to know how many retired participants remain in the plan, and if the plan has encouraged near-retirees to keep retirement assets in-plan.
“The older the participants and the more the plan sponsors are trying to encourage participants to stay in a plan as they age—which would mean into and then even during the retirement years—the more important a robust plan menu becomes,” he says.
Williams suggests plan sponsors can also use managed retirement income strategies for this cohort. To help older workers and retirees, plan sponsors can also include TDFs that have guaranteed minimum withdrawal benefits and other retirement income products such as annuities, he adds.
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