PLANSPONSOR - April/May 2018 - 13

Why the inconsistency? We suspect this is
due, at least in part, to a dearth of active/
passive blend TDF strategies. Over time,
however, we expect TDF allocations will
migrate to blend strategies, improving
alignment with plan sponsor preferences.
A blend approach makes good sense:
Go active where it matters, particularly
in fixed income, where alpha has been
historically more consistent; go passive
where it saves, especially in equities,
where the cost differential between active
and passive is significant, 59 basis points
on average.i
Blend TDFs that actively manage bonds
and passively manage stocks may not
only reduce plan costs, but they also may
deliver results that are superior to exclusively
active or passive approaches.
We make the case for active fixed income
in " Bonds Are Different: Active Versus
Passive Management in 12 Points. " Active
management has historically been
successful in fixed income because, in
part, unlike the equity market, the bond
market has a variety of structural inefficiencies
that active managers can exploit
to seek alpha. Data support our view:
About 80% of active fixed income managersii
beat
their median passive peers over
the five years ended 31 December 2017.
In contrast, only 37% of active equity
managersiii
outperformed their median
passive peers during the five-year period
ended December 2017.
The potential benefits of active fixed
income are great. This is most true for
individuals who are near or in retirement,
when glide path allocations to fixed income
peak. For example, a participant invested
in the market-average TDF that employs
actively managed bonds and generates an
additional 100 basis points (bps) of alpha
annually on the bond portion of the glide
path realizes a dramatic improvement in
retirement outcomes over a fully passive
approach. Asset longevity jumps by 19%
Hypothetical 40-year investment: cumulative impact of active fixed income
Industry average glide path (all passive)1
Industry average glide path (active fixed income)2
100
200
300
400
500
600
$700
Ending account balance
Hypothetical example for illustrative purposes only.
1
2
Asset longevity
Source: Morningstar, PIMCO, and Employee Benefit Research Institute (EBRI) as of 31 December 2017
Represented by median expense ratio of managers categorized as an " Index Fund " within the Morningstar Intermediate-Term Bond
Category.
Assumes a hypothetical 100 basis points of alpha generated from the fixed income portion of the industry average glide path, as
provided by Morningstar.
Salary and contribution assumption based on Employee Benefit Research Institute data. Return assumptions based on PIMCO's super
secular capital market assumptions.
No representation is being made that any PIMCO account, product, or strategy will or is likely to achieve profits, losses, or results
similar to those shown
(from 21 to 25 years) and retirement assets
increase by 9%. See Figure 1 above.
In short, we believe that qualified default
investment alternative (QDIA) strategies
that blend active bond investing with
passive equity exposure represent the
most capital-efficient approach-and can
potentially increase the odds that savers
reach their retirement objectives.
Retirement income:
Don't make perfect the
enemy of the good
When it comes to retirement income,
we think it's time to heed the advice of
the French philosopher Voltaire, who
SPONSORED SECTION
famously remarked, " Perfection is the
enemy of good. "
In theory, a perfect retirement income
solution would provide a guaranteed
level of lifetime income and an absence
of investment risk. In practice, mythical
solutions of this sort do not exist, and
most retirement solutions that include
some form of insurance guarantee are far
from perfect. They suffer from complexity,
high cost, incremental sponsor risk, and
a lack of transparency and transferability.
Not surprisingly, adoption of guaranteed
solutions by sponsors and participants has
been limited.
Surveys show, though, that participants
prefer good, if imperfect, solutions. They
30
19%
improvement
25
9%
improvement
$39k
4.1 years
20
15
$461k
21 years
10
5
Longevity of assets (years)
Real ending account balance (USD, thousands)

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PLANSPONSOR - April/May 2018

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