Defined Contribution Consulting Support and Trends Survey

Transcription

1 11th Annual Survey Highlights 2017 Defined Contribution Consulting Support and Trends Survey For institutional investor use only

2 TABLE OF CONTENTS Survey overview 1 Defined contribution business 2 Plan design and governance 6 Investment structure 8 Retirement income 15 2

3 Survey overview PIMCO s DC Practice has prepared the 11th annual Defined Contribution Consulting Support and Trends Survey to help plan sponsors understand the breadth of views and consulting services available within the DC marketplace. Our 2017 survey captures data, trends and opinions from 69 consulting firms across the U.S., which serve over 12,000 clients with aggregate DC assets in excess of $4.0 trillion. SURVEY PARTICIPANTS 69 DC consultants and advisors from 24 states 12k+ $4.0+ DC plan sponsor clients represented trillion in client DC assets AndCo Consulting DeMarche Associates, Inc. Pavilion Advisory Group Aon Hewitt Investment Consulting DiMeo Schneider & Associates Plan Sponsor Consultants Arnerich Massena Ellwood Associates PlanPilot Asset Consulting Group Fiduciary Investment Advisors Plante Moran Financial Advisors Atlanta Consulting Group FiduciaryVest, LLC Plexus Financial Services Bellwether Consulting Francis Investment Counsel Portfolio Evaluations, Inc. Blue Prairie Group Gallagher Fiduciary Advisors, LLC Precept Advisory Group BOK Financial Asset Management, Inc. Highland Associates ProCourse Fiduciary Advisors Bukaty Financial Highland Consulting Associates, Inc. Retirement Benefits Group Callan Hyas Group Rocaton Investment Advisors Cambridge Associates LCG Associates, Inc. Russell Investments Capital Cities Lockton RVK Capital Strategies Investment Group Lowery Asset Consulting Segal Rogerscasey CAPTRUST Marco Consulting Group SEI CBIZ Retirement Plan Services Marquette Associates Sellwood Consulting LLC Chao & Company, Ltd. Meketa Investment Group SHA Retirement Group Commonwealth Financial Network Mercer Spectrum Investment Advisors, Inc. Compass Financial Partners Morgan Stanley Summit Strategies Group Comperio Retirement Consulting Morningstar USI Advisors Inc Conduent NEPC, LLC Verus Cook Street Consulting, Inc. Newport Group Westminster Consulting Curcio Webb NFP Willis Towers Watson Dahab Associates NFP Corporate Services SE Wilshire Consulting 1

4 Defined contribution business DC CLIENTS In aggregate, this year s survey participants provide consulting services to over 12,000 plan sponsor clients. Over two-thirds (68%) serve between 25 and 250 DC clients each. The median number of plan sponsor clients that consultant firms serve is 87 (the average is 179). This number increased from last year s number of 70 (the average was 178). Total DC assets represented by the firms clients, in aggregate, exceed $4 trillion. More than three-quarters (82%) of the respondents advise on $50B or less in total client assets. The median respondent advises on $14.5B in client assets (the average is $58.3B). This number decreased from last year s number of $21B (the average was $65B). The median plan size is $78M (the average is $302M). Over half (54%) of the respondents median clients are between $50M and $500M. On average, the firms clients break down as follows: corporate (67%), not-for-profit (15%), public (10%), multi-employer (7%) and other (1%). Q: Please estimate the median plan size represented by your DC client base. (n=68) MEDIAN PLAN SIZE Average = $302M Median = $78M Q: What percent of your DC clients fall into the following categories? (n=67) CLIENT BREAKDOWN 7% 1% 10% Number of firms % 67% Corporate Not-for-profit Public Multi-employer Other 0 $1 $25 $50 $100 $200 $500 $1000 Median plan size ($M) 2

5 Defined contribution business DC BUSINESS The average revenue (as a % of total revenue) derived from DC is 47% (the median is 44%). This decreased from last year s number of 49% (the median was 45%). Three-quarters (75%) of DC revenues are derived from fixed dollar arrangements, while 24% are sourced from basis point arrangements. This was generally the same as last year. At the median, the firms are staffed with 12 DC-dedicated employees: 6 consultants, 3 research analysts, 1 non-research analyst and 2 support/other. Compared to last year s respondent pool, DC staffing is up by 5, including 2 consultants, 1 research analyst, and 1 support staff. Twenty-four consultant firms have non-u.s. DC-dedicated specialists, including 20 firms with specialists dedicated to the Canadian market, 8 to the U.K., 6 to Europe ex-u.k., 5 to Australia, 5 to Asia and 2 to Latin America. This is up from last year when only 20 firms reported non-u.s. DC-dedicated specialists. Q: What will your clients top 5 priorities be in the next year? (n=64) Top 5 priorities Review target-date funds 77% Evaluate investment fees 73% Evaluate how plan costs are paid 63% Evaluate administration fees 58% Simplify core lineup 45% Review managed accounts 30% Consider re-enrollment 27% Evaluate retirement income (both insurance and capital market solutions) 20% Review stable value 19% Evaluate DC OCIO/delegated opportunities 16% Review fixed income 13% DC SERVICES The top 5 services provided by the respondents are the following: investment policy development/ documentation (99%), manager selection and monitoring (99%), investment menu design (97%), recordkeeping searches (94%) and total plan cost/fee studies (94%). These are the same top 5 as last year. The top 5 growth services provided by the respondents are the following: total plan cost/fee studies (75%), investment default asset-allocation creation/management (e.g., target dates, balanced fund) (57%), investment menu design (51%), recordkeeping searches (49%) and discretionary oversight of investment selection and monitoring (46%). Almost all firms (99%) are willing to serve as a 3(21) non-discretionary advisor. The majority of consultants are willing to serve in a 3(38) capacity over manager selection (80%), over a glide path (64%), as a discretionary investment manager (54%) or as an outsourced CIO (51%). Q: Which of the following DC services do you currently provide to clients? (n=69) DC services currently provided Investment policy development/documentation 99% Manager selection and monitoring 99% Investment menu design 97% Recordkeeping searches 94% Total plan cost/fee studies 94% Investment default asset-allocation creation/management (e.g., target dates, balanced fund) 87% Governance reviews 83% Plan/benefits design (e.g., match level, plan type) 80% Discretionary oversight of investment selection and monitoring 77% Guaranteed/annuity product evaluations 71% 3

6 Defined contribution business DISCRETIONARY SERVICES Among the discretionary services currently provided by the respondents, over three-quarters conduct manager searches (83%), conduct/ document due diligence on managers (83%), decide when to replace managers (79%) and decide menu of investment choices (75%). Over half decide mapping policy (71%), decide investment default (70%), measure, monitor and negotiate fees (67%), develop custom glide path (59%) and monitor recordkeepers (54%). The top 5 growth discretionary services provided by the respondents are the following: conduct/document due diligence on managers (64%), decide menu of investment choices (64%), conduct manager searches (55%), decide investment default (55%), and measure, monitor and negotiate fees (55%). Respondents indicate that an average of 12% of their clients currently use their discretionary services, and it s expected that 18% will use them over the next 3 years. The vast majority of consultants believe that the perceived mitigation of fiduciary risk (85%), the ability to hand over reins on investments (82%), and insufficient/inadequate internal investment expertise (79%) are the dominant factors that drive plan sponsors to outsource the CIO. Consultants note several hurdles/concerns in offering DC OCIO services, including litigation risk (52%), marketing ability to win clients/build assets (42%), and the potential perceived conflict of interest (38%). Q: What percent of your DC clients currently use your discretionary services, and what percent of clients do you estimate will use your firm s discretionary services over the next 3 years? (n=62) USE OF DISCRETIONARY SERVICES Average Median 5% 10% 12% 18% 0% 10% 20% Currently use Estimated to use in the next 3 years Nearly a third (32%) of respondents reported providing DC OCIO services to at least 1 client, with an average of 29 (median of 6) and a total of 638. Total assets of $117 billion were invested in DC OCIO strategies across all respondents. Consultants expect, on average, an additional 12% (median of 10%) of clients to implement DC OCIO services over the next 3 years. 4

7 Defined contribution business CUSTOM ASSET ALLOCATION SERVICES Custom target-date services: Nearly half (48%) of respondents reported serving at least 1 custom target-date client, with an average of 11 clients (median of 4) and a total of 353. Total assets of $199 billion were invested in custom target-date strategies across all respondents. Consultants expect, on average, an additional 9% (median of 10%) of clients to implement these strategies over the next 3 years. Custom target risk/balanced services: Over a quarter (30%) of respondents reported serving at least 1 custom target risk/balanced client, with an average of 29 (median of 4) and a total of 611. Total assets of $44 billion were invested in custom target risk/balanced strategies across all respondents. Consultants expect, on average, an additional 7% (median of 5%) of clients to implement custom target risk/balanced strategies over the next 3 years. Custom multi-manager/white label services: Over a third (35%) of respondents reported serving at least 1 custom multi-manager/white label client, with an average of 8 clients (median of 3) and a total of 181. Total assets of $305 billion were invested in custom multi-manager/white label strategies across all respondents. Consultants expect, on average, an additional 12% (median of 10%) of clients to implement these custom multi-manager/white label strategies over the next 3 years. Custom managed account services: Only 20% of respondents reported serving at least 1 custom managed account client, with an average of 26 (median of 20) clients and a total of 359. Total assets of $119.5 billion were invested in custom managed accounts across all respondents. Consultants expect, on average, an additional 17% (median of 18%) of clients to implement custom managed accounts over the next 3 years. Q: To how many clients do you currently provide custom target-date services? (n=33) Q: What are the total assets in custom target-date strategies? (n=31) TOTAL CUSTOM TARGET-DATE CLIENTS TOTAL CUSTOM TARGET-DATE ASSETS Average = 11 Median = 4 Total = Average = $6.4B Median = $900M Total = $199B Number of firms Number of firms Number of clients 0 $1 $100 $250 $1,000 $5,000 $15,000 Client assets ($M) 5

8 Plan design and governance AUTO-FEATURES Nearly all consultants recommend auto-enrollment (98%) and auto-escalation (94%), while over half (54%) recommend auto-catch-up. At the median, consultants suggest a 6% autoenrollment rate, and a significant majority (88%) recommend a 1% auto-escalation rate. Eighty-four percent of respondents recommend capping auto-escalation between 10% and 15%. BROKERAGE WINDOWS Over a third (37%) of consultants recommend that plan sponsors include a brokerage window in their plan. Twenty-four percent recommend a mutual-fund-only brokerage window, and 13% recommend a full brokerage window. INVESTMENT ADVICE The majority (54%) of consultants actively promote online financial/retirement tools, while over a quarter actively promote one-on-one financial advice either via phone (29%) or in person (28%). Notably, only 21% actively promote managed accounts for accumulation, and even fewer firms (17%) actively promote managed accounts for decumulation. RETIREMENT TARGETS Consultants at the median suggest 80% of final pay as an overall income replacement goal. Assuming participants do not have a defined benefit plan or a retiree medical program, respondents at the median believe DC plans alone (i.e., excluding Social Security) should target to replace 70% of final pay. Contribution rate (%) Q: What starting auto-enrollment rate do you recommend? (n=53) What auto-escalation rate do you recommend? (n=51) Capped at what? (n=46) AUTO- ENROLLMENT RATE 10% 6% 1% RE-ENROLLMENT AUTO- ESCALATION RATE 88% 1% increase Bar represents the high and low of responses; the white line indicates the median response 12% 2% increase AUTO- ESCALATION CAP Median 12% Average 14% Nearly all consultants recommend clients consider re-enrollment of assets into the QDIA upon a significant investment menu redesign (90%) or a plan merger (84%). More than two-thirds recommend upon mapping of options from an eliminated fund (70%) or the introduction of a new QDIA (67%). Among the major concerns regarding re-enrollment, consultants indicate communication to participants (58%), actively allocating away from a participant s chosen risk level (53%), and the perception of being overly paternalistic (36%). To date, consultants at the median report that 10% of clients have re-enrolled, and consultants expect an additional 10% to re-enroll over the next 3 years. 6

9 Plan design and governance PLAN SPONSOR CONSIDERATIONS When asked to rank the factors that drive plan sponsor decision making the most, almost a third (29%) of consultants ranked meeting participant retirement goals at the top of the list, followed by managing litigation risk (25%). Consultants suggest that plan sponsors take these top 5 actions to manage fiduciary risk: benchmark plan costs (84%), hire an investment consultant (78%), document investment reviews (68%), conduct fiduciary training (59%), and move away from revenue sharing (55%). FEE PAYMENT AND REVENUE SHARING Over half of consultants recommend a flat dollar charge per participant (e.g., $50) for all plan sizes, and nearly a third recommend that the employer pays out of pocket. Fewer than 10% would reduce the match to allow the employer to pay fees. Nearly three-quarters would not charge fees pro rata across plan assets, regardless of plan size. Nearly half to two-thirds of consultants do not recommend revenue sharing for plans of any size. Less than half of consultants recommend revenue sharing only when the net fee is the lowest or only if revenue is rebated to participant accounts at all levels. CAPITAL MARKET ASSUMPTIONS The vast majority of consultants (86%) generate their own capital market assumptions. Consultants at the median forecast that emerging market equities will have the highest return (9.2%) and highest standard deviation (26.2%). Non-U.S. bonds are forecast to have the lowest return (2.1%) and near the lowest standard deviation (8.0%). Q: Over the next 10 years, what return and volatility assumptions (%) do you have for the following asset classes?* (n=34) CAPITAL MARKET ASSUMPTIONS (MEDIAN) Return (%) Global tactical asset allocation U.S. equity (large cap) Non-U.S. equity Commodities REITs Emerging market equity U.S. equity (small cap) 4 U.S. bonds TIPS 2 Non-U.S. bonds Volatility (%) FIXED INCOME EQUITY INFLATION-PROTECTION GTAA U.S. Non- U.S. U.S. large cap U.S. small cap Non- U.S. Emerging market TIPS Commodities REITs Global tactical asset allocation MEDIAN Return 2.9% 2.1% 6.8% 7.5% 7.3% 9.2% 2.6% 4.1% 6.3% 6.0% Volatility 5.0% 8.0% 17.0% 20.9% 19.1% 26.2% 6.0% 18.0% 18.9% 11.2% FIXED INCOME EQUITY INFLATION-PROTECTION GTAA 7

10 Investment structure ACTIVE MANAGEMENT Active management is seen as very important or important by the majority of consultants for 8 asset classes, including emerging market equity (94%), non-u.s. bonds (92%), U.S. bonds (88%), infrastructure/mlps (87%), U.S. small cap equity (82%), non-u.s. equity (developed markets) (82%), and commodities (66%). Only around a third of consultants rated active management as not important for U.S. equity (large cap) (37%) and TIPS (33%). EVALUATING MANAGERS When evaluating investment managers, consultants view as very important in-house research (79%) and qualitative screens (55%). Nearly a third also view field consultant insights (32%) and quantitative screens (29%) as very important. Q: How important is active management in the following strategies? (n=63) IMPORTANCE OF ACTIVE MANAGEMENT Very important Important Somewhat important Not important Emerging market equity 67% 27% 6% Non-U.S. bonds 56% 36% 8% U.S. bonds 48% 40% 8% 5% Infrastructure/MLPs 45% 42% 6% 8% Commodities 34% 32% 27% 7% U.S. equity (small cap) 30% 52% 17% Non-U.S. equity (developed markets) 25% 57% 18% Balanced strategies 21% 41% 29% 9% Target-date strategies 18% 28% 42% 12% REITs Treasury Inflation-Protected Securities (TIPS) 16% 10% 20% 33% 38% 33% 33% 19% U.S. equity (large cap) 2% 16% 46% 37% 8

11 Investment structure QDIA EVALUATION The vast majority of consultants (97%) recommend that target dates be used as the QDIA (qualified default investment alternative). The remainder suggest target risk or balanced strategies (2%) or managed accounts (2%).* When evaluating glide paths, consultants ranked the most important objective as maximizing asset returns while minimizing volatility relative to the retirement liability. At the median, consultants believe participants can lose 40% over 12 months with 40 years to retirement and still meet their retirement goal, 35% with 30 years to retirement, 20% with 20 years to retirement, 15% with 10 years to retirement and 10% at retirement. Q: What is the maximum 12-month loss a participant can withstand and still meet their retirement income goal? (n=46) 12-MONTH LOSS CAPACITY 0 40 years to retirement 30 years to retirement 20 years to retirement 10 years to retirement At retirement Maximum 12-month loss (%) % -40% -35% -35% -25% -20% -16% -15% -9% -10% -50 Average Median *Percent may not sum to 100% due to rounding 9

12 Investment structure QDIA RECOMMENDATIONS When evaluating and selecting default investment strategies, consultants noted the most important factors as the glide path structure (98%), fees (89%), diversification of underlying investments (73%), probability of meeting retirement income objective (55%), and quality of underlying investments (53%). The largest percentage of consultants recommend that plans with less than $1B select packaged active/ passive blend target-date strategies. For plans above $1B, consultants recommend custom target-date strategies (48%). Q: What qualified default investment alternative (QDIA) do you generally recommend?* (n=65) QDIA RECOMMENDATION 97% Target date Target risk or balanced Managed account 2% 2% *Percent may not sum to 100% due to rounding Q: What type of target-date offering do you recommend for plans of the following sizes? (n=64) Custom Packaged active/passive blend Single manager passive Semi-custom** Single manager active Packaged active multi-manager Above $1B 48% 27% 14% 6% 5% $500M $1B 25% 34% 15% 15% 7% 5% Plan size $200M $500M $50M $200M 5% 12% 47% 42% 22% 25% 2% 10% 17% 12% 3% 5% $25M $50M 5% 45% 27% 18% 5% Up to $25M 3% 44% 28% 2% 20% 3% **Prebuilt glide-path program from recordkeepers that use core menu options 10

13 Investment structure CORE MENU CONSTRUCTION In each of the past 4 years, consultants have recommended a core lineup that includes 1 capital preservation, 2 fixed income, 6 equity, and 1 inflation-protection option at the median. Nearly three-quarters (73%) of consultants recommend only active options within capital preservation. Close to zero respondents suggest passive only fixed income (2%), preferring active only (32%) or some combination of active and passive. No respondent recommends passive or active only equity. Nearly two-thirds of consultants recommend adding multi-manager/white label strategies at some plan size for fixed income and equity asset classes. Over a third recommend white label strategies for alternatives, inflation-protection, and capital preservation. Q: What is the optimal number of stand-alone options for each of these asset categories? (n=64) OPTIMAL CORE LINEUP 6 Number of options (median) Capital preservation Fixed income Equity Inflationprotection % recommending 100% 100% 100% 92% Construction* Active only Passive only Active/passive blend Multiple active & passive Mirrored active & passive 73% 32% 0% 38% 3% 2% 0% 17% 17% 22% 42% 27% 5% 24% 35% 6% 2% 21% 23% 2% *Categories may not sum to 100% due to respondents who indicated that the category be excluded 11

14 Investment structure CAPITAL PRESERVATION STRATEGIES Consultants #1 recommendation for capital preservation is stable value (59%), followed by government money market (15%). Over a fifth also recommend short-term investment fund (STIF) (28%), white labeled/blended option (25%), lowduration bond fund (1 3 years) (24%), and DCtailored ultra short bond fund (21%). Most consultants believe a plan sponsor is very likely to switch to stable value (65%) if they are seeking an alternative to money market funds. Over half of consultants believe it is unlikely sponsors will retain the prime MMF (75%) or move to a low-duration bond fund (55%). When evaluating stable value funds/managers, consultants view the following as very important: clearly understands book value risk (73%), depth of fixed income resources (65%), and fees (59%). Q: If a plan sponsor is seeking an alternative to a money market fund, how likely are they to switch to the following? (n=66) 5% 4% Very likely Likely Somewhat likely Not likely Stable value 9% 11% 18% 16% 43% 65% Retain or move to a government MMF DC-tailored ultra-short bond fund* 36% Short-term investment fund (STIF) 31% Short-term bond fund (<1 year) 35% Low-duration bond fund (1 3 years) 2% 9% 35% 32% 55% 29% 10% 44% 45% 45% 15% 5% 2% Retain the prime MMF (retail or institutional) 2% 7% 16% 75% FIXED INCOME STRATEGIES On a stand-alone basis, nearly all consultants recommend core or core plus (97%). In addition, over a third recommend offering foreign or global (44%), investment grade credit (42%), multi-sector (42%), and high yield (36%). Emerging markets, foreign or global, and high yield are recommended by 74% or more of consultants to be included in blended strategies. In addition, unconstrained, core or core plus, investment grade credit, long duration, multi-sector, and income focused are recommended by more than half of all consultants. 12 Q: Which fixed income strategies do you recommend (select all that apply) (n=66; n=43) Stand-alone* Blended** Core and core plus 97% Emerging markets 81% Foreign or global 44% Foreign or global 77% Investment grade credit 42% High yield 74% Multi-sector 42% Unconstrained 63% High yield 36% Core or core plus 58% Income focused 27% Investment grade credit 58% Unconstrained 20% Long duration 58% Emerging markets 18% Multi-sector 58% Long duration 9% Income focused 56% Other*** 6% Other*** 9% * Used as a stand-alone option on the core investment menu ** Used in a multi-manager/white label core option or in a sleeve in a custom target-date/risk portfolio *** Other: Core passive; inflation-linked; real asset blend; TIPS, low duration; short and opportunistic

15 Investment structure EQUITY STRATEGIES On a stand-alone basis, the vast majority of consultants recommend U.S. large cap (91%), non-u.s. developed (91%), and U.S. small/mid cap (88%). Style-based strategies (value or growth) are recommended for U.S. large cap (83%) and U.S. small/mid cap (80%). Within blended strategies, nearly all (97%) suggested including emerging markets, with three-quarters or more recommending non-u.s. developed (78%), U.S. large cap value or growth (75%), and U.S. small/mid cap value or growth (75%). Q: Which equity strategies do you recommend (select all that apply)? (n=66; n=36) Stand-alone* Blended** U.S. large cap blend 91% Emerging markets 97% Non-U.S. developed 91% Non-U.S. developed 78% U.S. small/mid cap blend 88% U.S. large cap value or growth 75% U.S. large cap value or growth 83% U.S. small/mid cap value or growth 75% U.S. small/mid cap value or growth 80% U.S. small/mid cap blend 72% Emerging markets 52% U.S. large cap blend 67% Global 52% U.S. all cap 58% U.S. all cap 45% Global 58% Other*** 5% Other*** 6% INFLATION-PROTECTION STRATEGIES For stand-alone inflation-protected strategies, consultants suggest inflation-linked bonds/tips (66%), a multi-real asset strategy (55%), and REITs (50%). Only 11% suggest commodities or floating-rate loans as stand-alone offerings. In blended strategies, commodities top the list, with 85% of consultants recommending this asset class. In addition, over two-thirds suggest REITs (78%), inflation-linked bonds/tips (73%), private real estate (68%), and a multi-real asset strategy (66%). Q: Which inflation-protection strategies do you recommend? (select all that apply) (n=64; n=41) Stand-alone* Blended** Inflation-linked bonds/tips 66% Commodities 85% Multi-real asset strategy 55% REITs 78% REITs 50% Inflation-linked bonds/tips 73% Commodities 11% Private real estate 68% Floating-rate loans 11% Multi-real asset strategy 66% Natural resouce equity 6% Floating-rate loans 63% Private real estate 6% Infrastructure/MLPs 59% None we do not recommend these strategies be included 3% Natural resource equity 54% Currency or gold 2% Currency or gold 39% Other 2% Other 2% * Used as a stand-alone option on the core investment menu **Used in a multi-manager/white label core option or in a sleeve in a custom target-date/risk portfolio *** Other: Global REIT; international (ACWI ex-u.s.); non-u.s. all country unhedged Other: Managed futures, global infrastructure 13

16 Investment structure ADDITIONAL STRATEGIES Two-fifths (40%) of consultants recommend as a stand-alone additional investment strategy a global balanced (e.g., GTAA), and a fifth (20%) support multi-strategy liquid alternative. Consultants show significantly greater support for including additional strategies in blends, including absolute return (53%), multi-strategy liquid alternative (53%), long/short equity (44%), global balanced (e.g., GTAA) (41%), private equity (38%), risk parity (35%), and smart beta (35%). Q: Which additional strategies do you recommend (select all that apply)? (n=45; n=34) Stand-alone* Blended** Global balanced (e.g., GTAA) 40% Absolute return 53% None we do not recommend these strategies be included 40% Multi-strategy liquid alternative 53% Multi-strategy liquid alternative 20% Long/short equity 44% Absolute return 18% Global balanced (e.g., GTAA) 41% Long/short equity 7% Private equity 38% Smart beta 7% Risk parity 35% Private equity 4% Smart beta 35% Hedge funds 2% Hedge funds 32% Managed futures 2% Managed futures 32% Risk parity 2% None we do not recommend these strategies be included 21% * Used as a stand-alone option on the core investment menu ** Used in a multi-manager/white label core option or in a sleeve in a custom target-date/risk portfolio 14

17 Retirement income RETIREE RETENTION On average, 55% of consultants clients either actively seek to retain retired participants assets (21%) or prefer retaining these assets, but do not actively encourage (34%). Only 13% of clients prefer that retirees move their assets out of the plan. More than two-thirds of consultants believe plan sponsors should allow distribution flexibility (73%) or add retirement education/tool to encourage retirees to retain their assets in the plan. The majority of respondents also support offering retirement drawdown advice (54%), allowing consolidation of non-plan assets (52%), and adding retiree-focused investment options (51%). Given implementation of the DOL fiduciary rule, over two-thirds (69%) of consultants anticipate retiree asset retention to increase. RETIREMENT INCOME STRATEGIES For retirement income strategies, over two-thirds of consultants actively promote or support client interest in the use of at-retirement target-date vintage(s) (80%), cash management (79%), managed accounts (71%), and income/multi-sector fixed income (e.g., global, high yield, credit) (66%). Less than half actively promote or support the following insurance-related products as retirement income solutions: asset allocation with lifetime income guarantee (49%), in-plan immediate annuity (49%), managed payout funds (43%), out-of-plan annuity (immediate and deferred) (41%). Consultants primary concerns with in-plan insurance products are cost (74%), portability (68%) and insufficient government support (62%). FIDUCIARY RULE Given implementation of the DOL fiduciary rule, consultants believe plan sponsors may increase distribution flexibility (64%), add retiree counseling (51%), or add more retiree-appropriate investment solutions (46%). Fewer than one-third believe plan sponsors may add in-plan or out-of-plan annuity/ insurance solutions (31% and 20%, respectively). Q: Approximately what percent of your plan sponsor clients take the below view on retaining retired participants assets in their plan? (n=61) Percent of clients 100% 75% 50% 25% 0% VIEW ON RETIREES Actively seek to retain these assets 21% Prefer retaining these assets, but do not actively encourage 34% Indifferent 32% Prefer retirees move assets out 13% Q: Do you anticipate retiree asset retention to change given implementation of the DOL fiduciary rule?* (n=59) No change 29% Decrease 2% Increase 69% *One response was excluded for indicating both an increase and a decrease 15 15

18 ABOUT PIMCO AND OUR DC PRACTICE Based in Newport Beach, California, PIMCO is a global investment management firm with over 2,000 dedicated professionals focusing on a single mission: to manage risks and deliver returns for our clients. For over four decades, we have managed the retirement and investment assets for a wide range of investors, including corporations, governments, not-for-profits, and other organizations, as well as for individuals around the globe. Our PIMCO DC Practice is dedicated to promoting effective DC plan design and innovative retirement solutions. We are among the largest managers of assets in defined contribution plans, offering investment management for stable value, fixed-income, inflation protection, equity and asset allocation strategies such as target-date solutions. We also provide analytic modeling, plus can help plan sponsors identify DC consultant resources. Our team is pleased to support our clients and the broader retirement community by sharing ideas and developments for DC plans in the hopes of fostering a more secure financial future for workers. If you have any questions about the PIMCO DC Practice, please contact your PIMCO representative or us at pimcodcpractice@pimco.com. All investments contain risk and may lose value. PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations and to economic and political risks, which may be enhanced in emerging markets. Certain U.S. Government securities are backed by the full faith of the government. Obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Stable value wrap contracts are subject to credit and management risk. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Investors should consult their investment professional prior to making an investment decision. The survey results contain the opinions of the respondents at the time of the survey and may not reflect current opinions or investment strategies. These results may or may not match the views of PIMCO and are not intended to be reflective of PIMCO s opinions on the market or any particular investment style or strategy. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA is regulated by the United States Securities and Exchange Commission. PIMCO Europe Ltd (Company No ) and PIMCO Europe Ltd - Italy (Company No ) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Italy branch is additionally regulated by the CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services and products are available only to professional clients as defined in the Financial Conduct Authority s Handbook and are not available to individual investors, who should not rely on this communication. PIMCO Deutschland GmbH (Company No , Seidlstr a, Munich, Germany) is authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie-Curie-Str , Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The services and products provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH ), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: The services and products provided by PIMCO Switzerland GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. PIMCO Asia Pte Ltd (501 Orchard Road #09-03, Wheelock Place, Singapore , Registration No K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. PIMCO Australia Pty Ltd ABN , AFSL (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. PIMCO Latin America Edifício Internacional Rio Praia do Flamengo, 154 1o andar, Rio de Janeiro RJ Brasil No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. 2017, PIMCO.

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