The lessons of the last market downturn seem to have faded from the collective consciousness of many retirement plan sponsors, according to a new study from MFS Investment Management.
The MFS Defined Contribution Investment Trends Study found that nearly 6 in 10 plan sponsors surveyed say they consider a track record of three years or less when selecting managers.
In addition, the study found that almost three-quarters of plan sponsors say they will put an investment manager under review based on underperformance over either one or three years.
The MFS Defined Contribution Investment Trends Study, which was conducted from Sept. 23 to Oct. 2, included 606 plan sponsors and 313 retirement plan-focused advisors who work with 401(k) and 403(b) plans.
“Many sponsors have succumbed to short-term pressures — and these are often misaligned with the long time horizons of plan participants,” said Ryan Mullen, senior managing director and head of MFS' Defined Contribution Investments practice, said in a statement. “The effectiveness and skill of an investment manager can only truly be judged over a full market cycle, which is longer than three years.”
The study also examines what plan sponsors and plan advisors look at when selecting target-date funds.
According to the survey, 64% of plan sponsors and 66% of advisors say investment performance is one of the most important things they look at when selecting target-date funds. Meanwhile, 46% of sponsors and advisors say fees are of prime importance.
Ravi Venkataraman, global head of Consultant Relations and Defined Contribution at MFS, says that plan sponsors tend to focus on performance as a key indicator of successful retirement outcomes.
“But the importance of asset allocation and risk management in driving performance is often overlooked,” Venkataraman said in a statement.
According to the survey, “embedded risk management” was the least important factor in driving TDF selection among both sponsors and advisors, 36% and 35% respectively.
Asset allocation had more mixed results among sponsors and advisors. Of the sponsors surveyed, 40% said asset allocation was an important driver in choosing TDFs, compared with 50% of advisors who said the same.
“[A]s we saw during the global financial crisis, these factors can have an outsize impact on the performance of a target-date portfolio," Venkataraman said in a statement.
According to Venkataraman, recent market volatility is a good reminder of the importance of “proper asset allocation” and “strong risk management."
“The careful implementation of these principles could help mitigate the potential cost of surprises that can derail investor portfolios, especially for those nearing retirement or those just beginning withdrawals,” he said.
During the last significant market downturn, TDFs designed to take an investor to retirement (the target date) significantly outperformed those designed to take an investor through retirement.
The study looks at the performance of 2010 target-date portfolios from the 20 largest TDF providers during the last downturn. It found that those funds that employed a more conservative “to retirement” allocation suffered average losses of 19.76%, while those that employed a more aggressive “through retirement” allocation had an average loss of 27.16%.
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