Survey: DC Default Design and Plan Characteristics
February 10, 2010 -- In 2010 PensionDCisions published its inaugural US Survey on DC default design and plan characteristics. This follows the same methodology as our U.K. program first reported on by the Financial Times in September 2007. The aim of the research is to provide transparency regarding actual participant outcomes delivered by DC plans.
PensionDCisions surveyed 65 large plan sponsors in the U.S., representing 1.7 million active participants and $163 billion in assets. Two thirds of these companies are listed in the Fortune 500. Among a number of important conclusions, three observations stand out:
1. Value for Money. It is hard for plan sponsors to recognise whether greater complexity and higher fees (e.g. as often found in customized default solutions) represent an investment worth making in order to improve outcomes for participants. It is possible that these solutions might deliver superior value over time, but factual evidence is lacking.
2. Influences in Distribution. The route taken by plan sponsors through the distribution maze has an important impact on provider selection and plan design. It is clear from this research that the involvement of a particular provider, such as the record keeper or investment consultant, can steer plans toward very different designs and outcomes. The resulting impact is often not apparent to plan sponsors and participants.
3. Lack of Transparency. Despite huge amounts of investment performance data, insight is in short supply and there is no efficient mechanism to enable plans to calibrate their design decisions. By benchmarking risk adjusted net returns actually delivered to plan participants there is an opportunity to help sponsors, providers and advisers better understand how different approaches to plan design and advice impact participant outcomes. This represents a step change in the way DC plans evaluate performance.
Graham Mannion, managing director of PensionDCisions, comments that, "as service providers compete for market share, pressure will increase for them to better understand customer needs and better demonstrate the value of their solutions. In parallel, the decision making process for plan sponsors and participants is becoming more complex, making it more difficult to connect with the most appropriate solution. Rigorous insight into the risk adjusted performance actually delivered to end consumers will enable all parties to make better decisions".
Below are further key findings:
ASSET ALLOCATION & PERFORMANCE
- On average, equities account for 81% of portfolio asset allocation during the growth stage, 72% at 15 years from retirement and 50% at retirement.
- There are significant variations between the risk adjusted returns of different sponsors' default solutions. Over 3 years, additional risk (volatility) has not been well rewarded, however, over the last year additional risk has led to greater returns.
- Over 3 years to September 2009, the average annualized return was -3.0% during the growth stage; -1.8% during the pre-retirement phase and 0.6% at retirement.
- Active solutions generated higher returns than passive solutions over one year, but underperformed passive over three years.
INTERRELATIONSHIP BETWEEN SERVICE PROVIDERS
- In the service categories of investment consulting, record keeping and investment management, a small group of providers holds the lion's share of relationships. Four investment consulting firms account for 58% of mandates, three record-keeping firms account for 67% of mandates, and two investment managers account for 55% of mandates.
- Selection of investment consultant has a material relationship with use of active management and use of customized solutions.
- Selection of record keeper has a material relationship with use of investment manager.
DEFAULT SOLUTION DESIGN
- 72 per cent of plans use an off-the-shelf target date fund. In approximately half of these cases, the fund is selected from the same entity as that providing record keeping services.
- 13 per cent of plans use a customized solution and for many of these there is a lack of transparency regarding the underlying product composition and performance.
- Plans using a customized default solution have, on average, $2.3bn in assets. Plans using off-the-shelf default solutions have on average $2.2bn in assets.
About PensionDCisions Limited
PensionDCisions specializes in independent analysis of retail investor data, including behavior and investment efficiency. The company uses award winning technology to transform record keeping data into a personal performance and behavioral track record for every individual investor. The resulting insight improves transparency and enables sponsors, participants and service providers to make better decisions. More information at www.PensionDCisions.com .
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