If there’s a relevant rallying cry for the retirement plan industry right now, it might be this: embrace change. That, at least, was the underlying message from Greg Jenkins, senior director with Invesco Advisors, Inc., in a talk at the SVIA’s 2015 Fall Forum in October.
Jenkins, also chair of Invesco’s Defined Contribution Institute, painted a picture of a retirement plan market that is changing in terms of who participates in it, how those participants are investing their money, and how plan sponsors and consultants are influencing their behavior.
It’s a market changing in size, too. Although baby boomers have begun to retire and withdraw assets from their defined contribution retirement savings plans, Jenkins predicted that the those plans will continue expanding thanks in part to an influx of millennials saving for retirement. He pointed to forecasts by McKinsey & Co. indicating that assets in defined contribution plans should grow from an estimated $5.8 trillion in 2013 to $7.7 trillion by 2018.
Changing investment strategies: As those millennials come to hold an increasingly bigger slice of retirement plan assets, the retirement industry can look for changes in how those assets are invested, too. Primarily, Jenkins seemed to suggest, it will be in target-date funds. “If you’re a millennial, they [target-date funds] are all you’ve ever known,” he observed. He cited data from Cerulli Associates indicating that about 40 percent of all new money flowing into larger defined contribution plans today is being allocated to target-date funds, and predicating that the proportion will reach 90 percent by 2019.
Among the key drivers of the target-date revolution are regulations issued under the Pension Protection Act of 2006, which granted qualified default alternative investment status to target-date funds. QDIA status affords fiduciary protections to plan sponsors who steer a plan participant into such an investment if the participant hasn’t made an investment choice of their own. Meanwhile, Jenkins said, increasingly popular plan features such as automatic enrollment and reenrollment of participants have boosted the number of participants who are being defaulted into QDIAs.
Target-date funds: This rise of target-date funds isn’t all bad news for the stable value market. Jenkins noted that in large plans the use of custom target-date funds is growing at a 39 percent compound annual growth rate, and importantly, those custom funds can incorporate stable value funds as one of their components. Right now, 21 percent of large plan sponsors are using custom target-date funds, Jenkins said, and 25 percent are using collective trusts that don’t belong to their record-keeper.
That said, there’s no requirement that custom target-date funds include a stable value component, and not all plan sponsors and their consultants fully appreciate the benefits that stable value has to offer. Among consultants, Jenkins said, “very few have the time necessary to study stable value. When consultants have a client going through a search [for a stable value manager], or that has had a problem [with their stable value fund], that’s when they dig into stable value.”
Still, because plan sponsors rely heavily on consultants, Jenkins said it will be important for the stable value community to continue to educate consultants about their product. He also emphasized that those efforts should be directed not only at the research staff of consulting firms but also at their field consultants, who interact directly with plan sponsors. “You may update the researchers, but you can’t assume that knowledge is flowing out to the field consultants,” he said.
Money market funds: Jenkins noted that plan sponsors and consultants also are wrestling right now with upcoming regulatory changes for money market funds, the most direct competitor to stable value funds.
Beginning in October 2016, money market funds that don’t invest exclusively in U.S. Treasury bills will be able to impose redemption fees or temporarily suspend redemptions if their investment portfolios fall below prescribed liquidity thresholds. It’s widely anticipated that some plans will balk at offering their participants money market funds that can’t promise 100 percent liquidity, on demand, for participant withdrawals, and that some of those plans may opt to offer stable value funds instead. Others could switch to money market funds that invest only in U.S. government securities, which will be exempt from the redemption fees and gates. “We’re expecting some movement to government money market funds,” Jenkins said, “but otherwise we don’t know what to expect.”
Reenrollment: Jenkins cautioned stable value providers not to tiptoe around the issue of reenrollment, in which a sponsor enrolls or reenrolls all eligible employees into their plan, including those who may not have participated in the past. “The last thing you need to worry about is that you’re putting the idea in their head by bringing it up,” he said. “Trust me, they’re already hearing about it from their consultants. Every plan sponsor is aware of reenrollment.”
In a typical reenrollment, plans default participants who don’t make their own investment selections into a QDIA. It’s not uncommon for that to significantly reduce the amount of money allocated to stable value. Jenkins cited two real-world examples. In the first case, stable value assets fell to $45 million from $180 million after reenrollment, then rebounded to $55 million six months later. In the second, stable value assets fell to $400 million from $800 million, then rebounded to $500 million six months later.
Given those sorts of numbers, Jenkins said it’s important that stable value providers work with plan sponsors to manage the impact of reenrollments on their stable value funds. “There needs to be a lot of communication,” he said. “Let them know you can do things to manage the impact, like carve out reenrollment of retirees if that’s an issue. You also can make sure they understand that you need time to get your portfolio ready for reenrollment.”