PSNC 2017: Trends in Fund Lineup Construction

Collective investment trusts, white labeling, smaller fund menus and “tiered” approaches are becoming the norm.

Investment returns in the next 10 to 15 years are projected to be about half of what they were in the preceding two decades, Sean Lewis, vice president and investment strategist for BlackRock, warned attendees of the 2017 PLANSPONSOR National Conference, in Washington, D.C.

Lewis shared his expectations during the panel session “Trends in Fund Lineup Construction,” which was moderated by Earle Allen, a partner at Cammack Retirement Group, and featured Holly Donovan, marketing manager of defined contribution (DC) for Invesco, as well as Michael Swann, director and DC strategist for SEI Institutional Group.

The esteemed panel were of one mind that, widely speaking, the DC retirement plan industry continues to migrate toward streamlined and simplified investment menus—especially the “three-tiered” approach with which many sponsors are already familiar. Under this approach, the panel explained, the first tier of the menu is populated by an automatically diversified qualified default investment alternative (QDIA), likely a target-date fund (TDF) or a managed account. The second tier is more or less your classic core menu, with anywhere from five to 15 or even 20 funds, possibly white labeled, for use by participants who prefer to design their own allocations—ideally with advice from a professional. Finally, the third tier is composed of a brokerage window, wherein the small handful of investment experts enrolled in the DC plan can do their thing and access the whole mutual fund marketplace. 

Even with this innovative approach to building menus, the experts agreed that workers today will be unable to invest their way out of the major challenges they will face. Simply put, with weaker investment returns anticipated for the foreseeable future, employees will have to save more, potentially much more, to meet their long-term goals.  

“No investment menu or allocation is going to help you the way that buckling down and saving more will help you,” Swann observed. “Still, it’s going to be helpful to make sure your investment options offer a sufficient chance for real diversification, and the fees must be appropriate.”

Donovan, therefore, urged plan sponsors to consider ways to blend the benefits of active and passive investments, and to consider using collective investment trusts (CITs) on their menu. She suggested that, in general, CITs can be 10 to 40 basis points (bps) cheaper than their mutual fund analogs, while delivering practically the same return performance.   

Swann and Lewis concurred that this is an important opportunity. They also advised plan sponsors to think more deeply about the fixed-income side of the menu—and about in-plan retirement income options.

“You cannot just invest in basic fixed income as a retiree today,” Lewis noted. “You need to maintain diversified equity holdings as well as fixed income, perhaps actively managed fixed income, even. We need more risk-reward diversification on menus for both workers and retirees … to get away from just market cap approaches.”