But will they say the same after tomorrow? 401(k) consultants say that active management remains the favored investment approach for most major asset classes and target-date retirement strategies, the PIMCO Defined Contribution Consulting Support and Trends Survey.
More than three-quarters of the surveyed 66 consultant firms, which advise on over $4.2 trillion in 401(k) assets, said active management is very important or important for U.S. and global bonds; emerging market and other non-U.S. equity; and U.S. small cap stocks.
Consultants continue to recommend that plan sponsors diversify retirement portfolios and complement core bonds through allocations to investment grade credit, high yield, multi-sector and foreign bonds within the core menu and/or custom/white-label strategies.
Meeting participant income goals for retirement is the most important consideration for plan sponsors, according to the survey. Consultants suggest targeting overall income replacement of 80% of final pay, three-quarters of which may need to come from defined contribution plans.
“To achieve that goal, consultants are seeking investment management that will deliver sufficient returns and help manage risk,” Stacy Schaus, executive vice president and author of the survey, said in a statement. “This includes adding diversifying bonds and tapping into active management.”
Other key findings:
- The vast majority of consulting firms surveyed continue to recommend target-date funds for a retirement plan’s qualified investment default alternative (QDIA). In addition, they rank “maximizing asset returns while minimizing volatility relative to the retirement liability” as the most important objective in glide path design.
- Consultant firms report total AUM under advisement within custom target-date, custom target-risk and custom multi-manager/white label of $195 billion, $39 billion and $333 billion, respectively, and expected growth of 8% to 10% over the next three years.
- Plan sponsors can help manage fiduciary risk by benchmarking plan costs, hiring an investment consultant, documenting investment reviews, conducting fiduciary training and moving away from revenue sharing. Notably, including index funds is not an action suggested by the vast majority.
- Nearly two-thirds of consultants (63%) say they are likely to recommend a capital preservation alternative to clients invested in a non-government money market fund. The majority (65%) recommend a switch to stable value, while 44% suggest a government money market and half are at least somewhat likely to recommend an ultra-short fixed income option or one tailored for DC.
- About two-thirds of respondents also recommend adding TIPS and/or a multi-real asset strategy to the core line-up. The vast majority recommend commodities (84%) and REITs (82%) be added to blended strategies in addition to a multi-real asset strategy and TIPS.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
