Defined Contribution Plans Evolving as Traditional Pensions Disappear

By Randy Myers


As traditional defined benefit pension plans continue to disappear around the world, the defined contribution plan market in the U.S. continues to evolve—with important implications for the stable value industry.

Speaking at the 2016 SVIA Fall Forum, Stacy Schaus, Executive Vice President and Defined Contribution Practice Leader for investment manager PIMCO, listed a number of key trends in the U.S. defined contribution market from their 10th Annual Defined Contribution Consulting Support and Trends survey:

  • Plans, especially larger plans, are shifting away from using off-the-shelf target date funds as their default investment option and are turning instead to custom target-date funds built on open architecture platforms and featuring a broader array of diversified assets.
  • Core investment lineups are becoming less equity-dominated and more balanced, and are broadening to include more real assets, diversified bonds, and global offerings.
  • Plan sponsors increasingly are encouraging plan participants to leave their balances in their employer-sponsored retirement plans after they stop working, and are adding more investment options and services aimed at retirees.
  • Automatic enrollment of eligible employees continues to grow in popularity.

Schaus said the growing number of defined contribution plans that automatically enroll eligible employees has dramatically improved plan participation rates. In a study by Aon Hewitt in 2015, for example, the participation rate reached 86 percent of eligible employees in plans with automatic enrollment, versus 63 percent in plans without it.

On the downside—for the stable value industry, anyway—auto enrollment is feeding a growing percentage of participant contributions into default investment options, such as target-date funds, and away from stable value funds and other core investment options. Partly as a result, target-date funds now account for about 25 percent of the assets in defined contribution plans, Schaus said, versus about 12 percent for stable value funds. She noted that more than 40 percent of new contributions to plans are being allocated to target-date strategies, while only about 10 percent are going to stable value.

All this, Schaus said, is a reminder that the stable value industry needs to continue pushing to have its products included in target-date funds. She suggested the industry focus its efforts on plans with more than $1 billion in assets, where 57 percent of plan consultants recommend the use of custom target-date funds that can easily accommodate a stable value component.

To make that happen, Schaus continued, the industry may need to further educate consultants about the benefits of including stable value in target-date funds. Right now, 97 percent of consultants recommend that stable value be included among a plan’s core investment options, but only 50 percent recommend stable value be included in blended investments, including target-date funds.

Schaus said consultants look first to fees and the diversification of a fund’s wrap providers when evaluating stable value funds and managers, followed closely by a clear understanding of a fund’s book-value risk, the depth of its investment resources, fixed-income manager expertise, and wrap-provider credit quality. Significantly less important, they say, are current crediting rates and diversification of fixed-income sub-advisors. Barely registering as key factors are past performance, less constrained guidelines, or having a boutique stable value provider.

Schaus noted that with millions of Baby Boomers reaching retirement age each year, plan sponsors increasingly are being urged to think about how they can help plan participants convert their retirement nest eggs into retirement income once they have stopped working. Asked which retirement income strategies they support most, consultants put target-date products with an at-retirement target date at the top of their list (actively promoted by 30 percent of consultants), followed by cash management products, including stable value (29 percent) and multi-sector fixed-income products (19 percent), Schaus said. Consultants show considerably less enthusiasm for in-plan deferred income annuities (9 percent), in-plan immediate annuities (5 percent), and managed payout funds (5 percent). Concerns about in-plan insurance solutions, Schaus explained, include the cost and portability of the products and the federal government’s failure thus far to create a fiduciary safe harbor for plans that offer them.

On a more positive note, Schaus said the stable value industry should be helped by new Securities and Exchange Commission regulations that require non-government money market funds to allow their net asset values to float, rather than maintain a constant NAV as has been standard in the past. Schaus said nearly two-thirds of consultants say they are likely or very likely to recommend that plans with a non-government money market fund replace it with an alternative capital preservation product. Where plan sponsors are seeking an alternative, she said, 81 percent of consultants say they are likely or very likely to recommend a stable value fund.