PLANSPONSOR - December 2017/January 2018 - 24

force at a law firm likely will have more interest in engaging.
Both Empower and Fidelity say that, as recordkeepers, they
already have substantial data on their plans' participants, even
if those people provide no additional information. " It used to
be that we maybe knew only a participant's balance and date of
birth. Now, we also know things like a participant's salary and
contribution rates, " Cosmano says. " So even if you don't engage
as a participant, we believe we can create a personalized allocation
that goes beyond what a target-date fund can do. "
Not all recordkeepers, however, feel comfortable with
hybrid defaults. The Vanguard Group Inc. has a couple of
concerns, says James Martielli, head of defined contribution
advisory services at the company, in Valley Forge, Pennsylvania.
" One is the engagement. Yes, once participants get close to
retirement, there tends to be higher engagement. But it's not
universal, for sure, " he says. " The second thing-and the key
thing-is that it's about defaulting participants into a more
expensive investment they haven't actively chosen. When you
transition a participant into a managed account, you have a
certain increase in cost, with uncertain benefits to the participant
in return. "
It is debatable whether the data that recordkeepers have
available now can adequately customize an unengaged,
defaulted participant's managed account, Martielli says. " If
you look at the variables that really make a difference when
it comes to changing the glide path, many pieces of data on
a recordkeeping platform [such as savings rate and starting
contribution date] make a smaller difference than other factors.
The bigger things-and these are hard to glean from current
recordkeeping data-are risk aversion, assets outside the plan,
and a participant's plans for his or her retirement, such as
continuing to work part-time. " -Judy Ward
The Retirement-Income Dilemma
" W
hen you think about it, what are the
objectives of a plan? To get people
saving-from the start of their career to
retirement-and then to use those assets
for income generation to get them through
retirement, " says Jason Shapiro of Willis
Towers Watson. " But the open question
is: 'Are target-date funds [TDFs] the best
vehicle for the spend-down phase?' "
To help with financial security in that
critical phase, some sponsors have turned
to default investments that incorporate a
guaranteed-income product. More than
7,000 plans currently use Prudential
Retirement's IncomeFlex, accounting for
approximately $2 billion in assets. About
20% utilize IncomeFlex in tandem with
their default investment, which together
cover 80% of the assets in those plans,
according to Doug McIntosh, Prudential
vice president of full-service investments
in Hartford, Connecticut.
McIntosh points out several ways that
integrating retirement income with targetdate
funds or other defaults can help participants
achieve better outcomes. " Participant
behavior improves during market downturns.
We've seen that participants are
less likely to peel out of their allocation in
a downturn if they've got an income guarantee
in place, " he says. " And when you put
a tangible income product into your plan,
you're also putting in a calculator that tells
participants a real number on the income
they'll get in retirement. That real number
often spurs participants to take action and
save more. "
With these investments, participants
pay a fee for the underlying funds of a
qualified default investment alternative
(QDIA), such as a TDF, plus a wrapper for
the lifetime-income guarantee; those two
fees together make up the total expense
ratio. " In the marketplace, the fees for these
hybrid products range from about 40 basis
points [bps] to 105 basis points. Our guarantee
typically comes in at around 100 basis
points, " McIntosh says. On the bottom end
of that fee range, " you have some less-rich
guarantees and more strings attached-
such as when participants can start taking
their money out-and surrender charges
for taking money out earlier, " he says.
Skepticism about sponsors' ability
to justify the fees paid by participants for
this kind of hybrid TDF exists. Not every
participant wants an annuity, says Michael
Esselman of 401k Advisors Intermountain.
" To add that extra fee as part of the QDIA
for the whole plan, especially if you have a
varied work force, is tough, " he says.
Making the fee issue thornier is the
fact that these products still lack portability,
Esselman says. " We're not against
24 PLANSPONSOR.com December 2017-January 2018
annuities in 401(k)s, " he says. " But,
currently, if the sponsor makes a recordkeeper
switch, participants who have been
paying the fee for that annuity product for
years either lose that benefit or have to
roll it into an IRA [individual retirement
account] outside the plan. "
Sponsors wanting to help participants
with decumulation but feeling unsure of
in-plan annuities can use plan design and a
decumulation-focused TDF family instead,
suggests Nick Nefouse, managing director
and head of U.S. defined contribution (DC)
investment strategy at BlackRock Inc. in
New York City. " Most plan designs are not
set up for 'auto-retire,' " he says. Facilitating
decumulation means allowing participants
to make systematic withdrawals and
ensuring that they pay no fee for those
withdrawals, he adds.
Sponsors taking this approach need
TDFs set up that will manage uncertainty,
thereby helping participants through
the decumulation phase, Nefouse says.
BlackRock structures its LifePath Portfolios
to help retirees maintain a consistent standard
of living. The funds have a relatively
high allocation to equities early in the glide
path and, over time, reduce equity exposure
to help manage longevity risk. They
also utilize inflation-hedging investments
to help minimize inflation risk. -JW
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