Knowing What You Own
This year’s survey reveals that sponsors may rely too heavily on advisors
and consultants for decision-making and due diligence when it comes to plan
investment options and defaults. As fiduciary scrutiny continues to increase,
a higher level of in-house “ownership” may be needed by plan sponsors.
The 11th annual PLANSPONSOR/Janus Henderson Investors annual defined contribution (DC) investment study collected
data from approximately 4,000 U.S. plans of all sizes, and reveals
some enlightening juxtapositions in sentiment versus knowledge
and action among retirement plan sponsors. On the one hand,
sponsors are more confident than ever about their target-date
funds (TDFs) and Qualified Default Investment Options (QDIAs);
however, many claim they “don’t know” when asked about the
specifics of those investments. Advisors and consultants may be
filling the gaps, but that doesn’t necessarily get plan sponsors off
the hook from a fiduciary standpoint.
More than half of plan sponsors overall continue to believe
that TDFs are the best QDIA for their employees, and that is
particularly the case among large plans (those with $200 million
to $1 billion in DC assets), where roughly three quarters say that
TDFs are the best QDIA; and mega plans (those with more than
$1 billion in DC plan assets), where 84% say the same. When
choosing and evaluating their plan’s QDIA, fund performance is
still the most important consideration overall, but smaller plans
seem to put more emphasis on performance. Larger plans are
more focused on the investment allocation within the QDIA fund.
As has been the case in the past, low fees are also an important
consideration for plans of all sizes.
Target-Dates on Target?
Of those plans that have selected a TDF as their default investment, many are still using a single-manager fund. “Firstly, there
is nothing fundamentally wrong or improper in selecting a single-manager TDF. Such a decision may well be fit for purpose given
a plan’s needs and specific participant population. Having said
that, one would be wise to ensure the facts and circumstances of
the participant base is documented given the DOL signaling that
multi-manager solutions are worthy of consideration. Bottom line,
as with all fiduciary-related activities, a reasoned and informed
process should underpin the decision,” notes Russ Shipman,
Managing Director and Senior Vice President of Janus Henderson’s Retirement Strategy Group.
However, when plan sponsors were asked whether their
plan’s education about TDFs is effective, 12% were not sure.
Similarly, more than one in 10 plan sponsors are not confident
or don’t know if their plan’s current QDIA is the best option for
employees, or whether employees understand the structure and
intent of TDFs.
When it comes to monitoring their plan’s TDF, only about six
in 10 plans say they evaluate or benchmark the fund at least annu-
ally. A startling 24.3% of plans are not sure how often or “never”
evaluate or benchmark their TDF. “Although many do a great job
in this area, we respectfully remind plan sponsors that TDF selec-
tions – be they QDIAs or not – hold at least the same amount
of fiduciary risk as any other selection within a plan menu with
regards to their benchmarking,” adds Shipman.
Not Sure? Not Good!
In general, TDFs are structured with “glide paths” that incrementally increase the fixed income component and decrease the exposure to stock market volatility as the participant nears retirement.
When asked specifically about whether they are monitoring the
duration of the fixed income component of their TDFs, a whopping 37.2% of plan sponsors are not sure if they are doing so. “It’s
always surprising to us that plan sponsors aren’t focusing more
energy on that embedded fixed income exposure for participants.
Rates fell for essentially three decades and are now in a sideways
to up-biased mode. So, everything else constant, a typical glide
path exposes participants closest to retirement to the greatest
interest rate risk. This fact is worthy of investment committee
attention, in our view,” adds Shipman.
Even among the largest and presumably most sophisticated
plan sponsors, more than one quarter are not sure if the fixed
income component within their TDFs is monitored. Similarly,
and just as troubling, more than half of micro-sized and nearly
18% of mega plan sponsors are not even sure what their TDF
is composed of, investment-wise. “As target-date funds have
gained in popularity and become the chosen default investment
by many employers, the responsibility for fiduciary oversight has
never been more important,” says Shipman. He concludes, “We
cannot stress enough how plan sponsors must understand the
nuances of the investments they are defaulting their participants’
assets into, and not just rely on providers to do that work for them.
Most plan sponsors do a fine job, but the stakes are high as the
retirement readiness of millions of Americans is dependent on
having access to good plan and investment scaffolding.” n
METHODOLOGY: In conjunction with PLANSPONSOR, Janus
Henderson Investors developed a series of questions for defined
contribution plan sponsors specifically pertaining to target-date and
QDIA fund knowledge, satisfaction, and construction. These questions
were included in the PLANSPONSOR 2017 Defined Contribution
Survey, which was conducted via an online questionnaire from July
to September 2017. More than 4,000 respondents participated in the
survey. For more information, contact email@example.com.