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DCIO Trends to Monitor

Leading firms weigh in on what advisors need to keep an eye on.

Defined contribution investment only (DCIO) assets dominate the defined contribution (DC) market and their influence is only growing.

Here’s an interesting stat from Sway Research. The firm estimates that DCIO assets would comprise 51% of the total DC market by the end of 2019 with continued growth, reaching 54% by year-end 2023. Given DCIO’s prominent and growing role in the market, I thought it worthwhile to ask spokespersons with several leading DCIO firms for their thoughts on the key trends that plan advisors need to monitor.

Cheri Belski
Head of Retirement, U.S. Intermediaries
T. Rowe Price

The proliferation of customized investment strategies in the DC marketplace requires a new level of due diligence rigor from advisors servicing DC plans. The days of relying on modern portfolio theory to benchmark the performance of investments tailored for the DC marketplace are gone, as more detailed information regarding these investments is made available. 

The intricacy of qualified default investment alternative (QDIA) offerings, whether a traditional target date suite or a managed account offering, demand deep understanding beyond portfolio construction and asset class correlations. QDIAs require insight into a plan sponsor’s preferences and objectives for their plan, appreciation for investor behavioral tendencies, and consideration of the many challenges associated with saving for a secure retirement. We’ve found success working with our partners to provide proprietary research and evaluation tools to give critical context and information to help enhance the decisions consultants make on behalf of our mutual clients.

In addition, the recent passage of the SECURE Act is sure to accelerate an industrywide focus on equipping plan sponsors and participants with retirement income solutions. With greater numbers of Americans relying upon their DC plan as their primary source of retirement funding, the need for guidance to both plan sponsors and participants on sustainable retirement income options is acute. 

Sean Kenney, CFA
Head of Defined Contribution

In 2020, we believe several important trends should be on the minds of retirement plan consultants. First, after a year of exceptional returns in 2019 and on the heels of the longest bull market in history, we believe that the next 10 years are likely to look different from the last. We forecast that expected returns for the next 10 years for most asset classes will be lower than what we have seen over the past 10 years. For example, we estimate that a hypothetical portfolio of 60% global equity and 40% global bonds will have a 10-year annualized return of approximately 3.3% as compared with a return of 7.2% over the past 10 years. In what we expect will be a lower-returning and lower-yielding market environment, asset allocation and active management will be crucial in positioning participants to secure an adequate and sustainable retirement.

Given this forecast, we believe two actions are appropriate: First, DC plan sponsors should take a close look at the amount of equity risk participants approaching retirement are exposed to and consider proactive measures to mitigate and communicate drawdown risk for this cohort. Second, persistently low interest rates suggest sponsors should take a fresh look at the fixed income options available in the investment lineup, including the underlying fixed income strategies in a plan’s QDIA such as target date funds. Traditional U.S.-based core fixed income funds, which are prevalent on DC menus, may not provide sufficient return and diversification characteristics, and sponsors may want to consider broadening participants’ fixed income exposure.

Also, while sustainable-investing approaches that consider environmental, social and governance (ESG) factors are hardly new, they are now making their way into the DC marketplace in a meaningful way. As consumers continue to encourage businesses to operate in sustainable and responsible ways through their buying habits, so too are investors. In particular, younger plan participants are expressing interest in these approaches, which is significant given that millennials now represent the largest generational cohort in the U.S. workforce. A 2017 survey from Morgan Stanley's Institute for Sustainable Investing showed that 90% of millennials were somewhat or very interested in pursuing sustainable investments in their 401(k) plan. Given that retirement accounts tend to be the largest investment portfolio most people own, we anticipate the interest in sustainability to continue accelerating in DC plans into the future. Retirement plan consultants should consider discussing this topic with plan sponsors in 2020 and evaluate if there is an appropriate path forward for the plan.

Brendan McCarthy
National Sales Director, DCIO

When you look at what trends are emerging in 2020, I think target date funds (TDFs) are the most notable area. You’re going to see these products become more sophisticated and begin to have more of a traditional pension-type look and feel to them. We’re already seeing them starting to include more institutional-type asset classes—including private markets. I anticipate top TDF managers exploring the inclusion of more asset classes, such as private equity, private debt and even agriculture, for example. Investments that you would traditionally find in those large, defined benefit pools are going to start to morph their way into target date series, as they can offer a greater chance for an improved participant experience and better investment outcome.

Another trend that will emerge in 2020, and I don’t think this is any surprise, is the growth of socially responsible investments in 401(k) plans. What we’re seeing right now is more and more plans and their consultants adding a few socially responsible options. It’s typically a socially responsible equity or fixed income fund, and plan sponsors often are putting them into the menu so that they can satisfy a particular group of participants within the plan. For example, 93% of millennials prefer to invest their money in a socially responsible manner, according to Nuveen’s Fourth Annual Responsible Investing Survey.

It is actually a requirement of every 401(k)-plan sponsor under ERISA to assess the investment needs of the participants within their plan and provide an investment menu that meets those needs. So, if a large demographic percentage of the plan seeks to invest their money in a socially responsible manner, you can help meet those fiduciary needs by including a couple of socially responsible options in the plan. We are seeing a lot more of consultants begin to include these as menu options within the plan.

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