Personalized solutions reportedly are becoming more attractive for plan sponsors who are encouraging those saving for retirement to remain with their 401(k) provider after they leave the workforce.
That’s according to PIMCO’s 16th Annual Defined Contribution Consulting Study, which surveyed 36 consultants and advisory firms that serve more than 37,000 clients with $6.9 trillion in total assets in DC plans. Most consultants surveyed said tailored solutions are a top priority for the industry. Approximately 80% of aggregators and 65% of large institutional consultants recommend personalizing retirement offerings for their clients that offer individual retirement plans.
Institutional consultants’ top priority is to expand custom investment solutions capability; for larger plans, a custom target date fund (TDF) format is their first recommendation. The most important advisor managed account features include “personalized investment experience for the participant” and “participant data integration technology.”
“A generational shift in how Americans plan for retirement is creating demand for a more dynamic approach to saving and technological advances have made solutions tailored to plan participants specific circumstances much more accessible to the broader public,” said Rene Martel, Managing Director and PIMCO’s Head of Retirement.
Retiree Assets
Additional findings show that most sponsors advised by consultants prefer to keep retiree assets in the plan (76%). In fact, over the last eight years, institutional consultants have reported a significant decline in sponsors being indifferent or averse to retaining assets—down to only 25% today versus 55% in 2015.
Moreover, 90% of aggregators and 80% of institutional consultants believe that DC plans should offer investments and services that support retiree spending needs (i.e., retirement tier), while 80% of consultants don’t believe the current plan options suffice as options for retirees, PIMCO notes.
Among the most popular recommendations for plans seeking to hold onto retiree assets were allowing flexibility in income distribution, adding retirement education/tools, communicating the value of staying in plan and adding retiree-focused investment options.
While most prefer to keep retiree assets in the plan, consultants and aggregators diverge on recommended retirement income solutions. Institutional consultants prefer TDFs with a regular level payout by a wide margin (64% vs. 10%), while aggregators prefer managed accounts as a retirement income solution (60% vs. 40%). Aggregators also preferred in-plan annuity options (deferred, immediate or QLAC) (50% vs. 10%).
TDF Factors
TDFs continue to dominate as the near-unanimous recommended default option, with all consultants and advisors surveyed ranking it as their No. 1 choice, the study notes. In addition, both institutional consultants (60%) and advisors (60%) said that their clients’ top priorities include reviewing TDFs.
When selecting a TDF, the glidepath and fees remain the top leading factors, PIMCO notes. When replacing a TDF, all consultants focus on reducing fees and on performance relative tio its peer group. Institutional consultants specifically cite a change in plan demographic and concern over glide path allocation as increasing reasons for changing TDF providers.
Institutional consultants and aggregators are also recommending TDFs that blend active and passive management styles more in most plan size segments, the survey found.
Nontraditional Investments
Interest in nontraditional DC plan investments is increasing. According to the findings, more than 80% of consultants surveyed consider ESG when selecting investment options, with 40% stating that evaluating and/or adding ESG options is among their clients’ top priorities.
The survey also found that institutional consultants are split almost evenly when it comes to incorporating ESG, with 43% recommending that it be an evaluation factor for all funds and 39% preferring to offer funds explicitly branded as ESG.
In addition, a third of consultants believe private investments benefit all clients’ multi-asset portfolios, with direct real estate, private equity and private credit receiving the highest consideration.
As for the core menu, more than 80% of consultants recommend CITs when they save 1-3 basis points versus mutual funds in the core lineup or the default option, the study noted.
Responses for the survey were collected from Jan. 4, 2022, through March 7, 2022. Published results were based on responses from firms with more than $10 billion in DC assets under management.
