Defined contribution plans will play a significant role in determining the retirement well-being of many American workers, but investment performance and diversification—rather than low fees alone—should be of paramount concern, according to Angela Antonelli.
It’s how executive director of the Center for Retirement Initiatives at Georgetown University framed a recent roundtable of industry participants on the topic.
David O’Meara, head of DC strategy at Willis Towers Watson, noted that 81 percent of plan sponsors now only offer a DC plan to their new employees, and target date funds dominated qualified default investment alternatives—where the majority of all new DC plan contributions flow.
Highlighting certain findings from a recent Georgetown/Willis Towers report, O’Meara explained how expected annual retirement income increases from $53,000 to $62,200 when a diversified selection of alternative investments is incorporated into a TDF.
“The expected retirement income can be increased dramatically while also mitigating downside risks,” he said. “At age 65, an individual could expect investment returns to increase from 5.1 percent to 6.1 percent. The challenges to creating better investment solutions in DC plans can be effectively managed to allow plan sponsors to take steps toward enhancing retirement outcomes for their participants.”
Why isn’t there greater diversification of asset classes in TDFs today, O’Meara rhetorically asked?
“It’s accepted in the defined benefit world but not in DC plans. What are the challenges to be overcome and can they be easily addressed?”
Noting the high valuation of public markets and their recent volatility, Antonelli asked, “If what goes up must come down, should there be a sense of urgency to enabling greater diversification?”
“Do fiduciaries believe that the robust stock and bond returns that we have experienced since 2009 will continue indefinitely? Christopher Nikolich, head of Glide Path Strategies, Multi-Asset Solutions, at Alliance Bernstein responded. “If not, they had better consider additional forms of diversification within their target date fund.”
Fear of litigation and a strong trend towards lowering investment management fees by allocating capital to passive and index strategies present significant hurdles to achieving TDF diversification.
“Sponsors look to regulators and policymakers for direct guidance, which is often followed by adoption,” O’Meara concluded. “Support is needed to encourage the investment design evolution that can materially improve retirement outcomes.”