Retirement P lan Default Funds

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Maryann Adams
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Retirement P lan Default Funds Are you choosing

offered through Sentinel Pension Advisors, Inc.

1 Retirement P lan Default Funds Are you choosing the right one for your plan? June 18, 2015 Presented by: Ryan Campagna, CFP, AIF Senior Investment Advisor Advisory services offered through Sentinel Pension Advisors, Inc., a SEC-registered investment advisory company. WEB

2 Where are we today?

3 Where are we today? Over the past 35 years there has been a clear shift from Defined Benefit to Defined Contribution Plans From DC plans have doubled from 315,000 to 634,000 DB plans have declined 65% from 126,000 to 45,000 From a participant standpoint DB Plans were relatively easy to understand DC Plans can be very overwhelming Retirement Research Inc, Retirement Markets April 2014, Market Size, Segmentation and Trends

4 Why It s So C onfusing! When to start? How much to take out? How much to save? When to retire? How to invest? Roth vs. Traditional? 1. Risk Tolerance? 2. Asset allocation? 3. Diversification? 4. Index vs active? 5. Cost? Diversification neither assures a profit nor guarantees against a loss in a declining market.

5 Too many choices! ERISA 404 (c) compliance only requires three asset classes of various risk Cash (money market/stable value) Fixed Income Equity We can agree that people demand more choices than that In the recent past it wasn t unusual to find DC plans with investment choices The average DC plan today offers 25 investment choices

6 Why are asset allocation vehicles popular? They make a complex decision easy Simple Just choose one Diversification Asset allocation done for you Expertly Managed People want help QDIA Safe Harbor Diversification neither assures a profit nor guarantees against a loss in a declining market.

7 Why are asset allocation funds so important? Two Reasons: Auto-enrollment and QDIA! QDIA: Qualified Default Investment Alternative 1. A product with a mix of investments that takes into account the individual s age or retirement date (life-cycle/target-date fund) 2. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund); 3. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual s age or retirement date (for example, a professionally-managed account); 4. A capital preservation product for only the first 120 days of participation (for example, a money market fund).

8 Why are asset allocation funds so important? Two Reasons: Auto-enrollment and QDIA! Retirement Research Inc, Retirement Markets April 2014, Market Size, Segmentation and Trends

9 Asset Allocation: Risk Based vs. Target Date

10 C omparing Features What this looks like in practice: Goals: Key features: Key assumptions: Risk Based Allocation 3-5 fund options ranging from conservative to aggressive allocations Manage to a set risk tolerance Participants have to change their selection as their risk tolerance changes Participants control their risk level Target Dates To Target Dates Through Funds available in 5-year increments from 2000 to 2060 Get participants to a balance that they can retire on The vehicle gets more conservative over time and becomes most conservative at the stated target date of mutual fund. Assumes participants cannot withstand large fluctuations in their portfolio balance as they approach retirement age Funds available in 5-year increments from 2000 to 2060 Help participants mitigate the risk of outliving their assets The vehicle gets more conservative over time and becomes most conservative at some point after the stated retirement target date. Assumes participants can withstand large fluctuations in their portfolio balance as they approach retirement age A target date fund is the approximate date when investors plan to start withdrawing their money. The principal value is not guaranteed at any time, including at the target date.

11 Growth of Asset Allocation and Target Date Funds Retirement Research Inc, Retirement Markets April 2014, Market Size, Segmentation and Trends

12 Which is Best for your P lan?

13 C onsider what s Most Important for Your P lan Demographics Participant Behavior Do participants want to actively change their investments or are they inclined to not revisit them once they ve selected them? Target dates require less management by participants. Risk based models require some level of awareness. Plans with participants who exhibit optimal behavior might lean to the through target date strategies, whereas suboptimal participant behavior might lead to to target date strategies Loans Early withdrawals Steady contributions Contribution levels (10%) Prioritizing Risk Outliving Assets Retiring at the expected time Inflaton

14 A C loser Look at Risk Based Models

15 Sample Risk-Based Portfolio Allocations Conservative Lifestyle Moderate Lifestyle Balanced Lifestyle Growth Lifestyle Aggressive Lifestyle Lower Risk Tolerance Higher Risk Tolerance

16 Challenges of Monitoring Risk-Based Strategies What s the problem? Typically these funds are placed within Morningstar peer groups alongside funds with differing goals and objectives. Understand Your Funds 1. Which asset classes can they invest in? 2. How much flexibility do managers have? Are allocations static or dynamic? For a given set of market conditions, static allocations are more predictable than dynamic.

17 How to Monitor Risk-Based Strategies 1. Understand how the allocation may differ between each respective fund relative to both its peer group and benchmark and compare performance, risk, and risk-adjusted returns. Evaluate if the funds achieved an appropriate return given the level of risk they took. 2. Given context with what is happening in the market, performance should be in line with how the funds invest. For Example: A series that maintains overweight domestic equity exposure vs peers may be expected to outperform (lag) if domestic equity outperforms (lags). A series that does not invest in real estate would be expected to lag peer funds that invest in real estate when real estate outperforms.

18 A C loser Look at Target Dates

19 Understanding the Glide Path Most conservative point happens at the same time, but the amount of equity still varies To Series A To Series B Through Series C Through Series D

20 Understanding Asset C lass Exposure To Series A To Series B Through Series C Through Series D

21 Honing in on Key Differences To Series A To Series B Through Series C Through Series D

22 Challenges of Monitoring Target Date Strategies What s the problem? There is not a significant population of peers. Consider this: there are 56 distinct 2030 funds available from just 41 fund families. The glidepath of the funds differ fairly significantly. The amount of equity present in each series at retirement date varies. Understand Your Target Date Strategy 1. What s the glidepath look like? When does the series get most conservative? 2. Is it designed to generate higher potential return or to manage risk on the downside? 3. What is the appropriate time horizon? 4. Which asset classes comprise the funds opportunity set? 5. How much tactical flexibility does the manager have? There is a tradeoff between predictability and the ability to be opportunistic. 6. What risks is your strategy most focused on mitigating?

23 How to Monitor Target Date Strategies 1. Understand how the allocation may differ between each respective fund relative to both its peer group and benchmark and compare performance, risk, and risk-adjusted returns. Evaluate if the funds achieved an appropriate return given the level of risk they took. 2. Evaluate the funds with the appropriate time horizon in mind (to vs through). 1. Asset class performance can vary widely in the short term. 2. Market cycles can vary in length of time. 3. Funds nearest to retirement date may have more dispersion in performance. 3. Given context with what is happening in the market, performance should be in line with how the funds invest.

24 Questions?

Contents. Introduction to PSCA s 58th Annual Survey Respondent Demographics Employee Eligibility Participant Contributions...

Contents. Introduction to PSCA s 58th Annual Survey Respondent Demographics Employee Eligibility Participant Contributions... Introduction to PSCA s 58th Annual Survey... 1 Respondent Demographics... 2 Table 1 Respondents by plan size and plan type... 2 Table 2 Respondents by total plan assets and plan type... 4 Table 3 Respondents