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Cerulli Looks to Large DC Plans for Evolving Trends

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Cerulli identified two trends taking shape in large defined contribution plans that it believes will trickle down to smaller plans, according to the first-quarter edition of The Cerulli Edge.

Large defined contribution plans tend to be “incubators” for new retirement products, according to Cerulli, pointing to automatic features and adoption of target date funds as examples. Plans with more than $100 million account for almost 70% of 401(k) assets, even though they represent less than 1% of all 401(k) plans, according to the report.

Evolution of QDIA Options

Cerulli found that large plans are becoming more receptive to using managed accounts as qualified default investment alternatives instead of target date funds.

Although Cerulli believes target date funds “should be viewed as a success” in retirement plans, they have their detractors.

“Critics deride target date funds for their one-size-fits-all structure,” Bing Waldert, managing director for Cerulli, said in a statement.

Critics also worried about funds offered by recordkeepers that only included their own underlying investments in the funds, especially in the early days of TDFs, the report noted.

Waldert said managed accounts “seek to provide superior retirement solutions without added fees.”

A 2015 study by Cogent Reports found that the number of mega plans, those with $500 million or more in assets, offering managed accounts as their QDIA increased from 5% in 2014 to 18%. Deloitte’s 2015 defined contribution survey found 34% of all DC plans offered managed accounts, with 38% of those saying between 1% and 5% of participants use the managed account service. Less than a quarter of respondents in that survey said the participation rate in managed accounts was under 1%.

“Asset managers should closely watch product development in QDIA trends in the DC market,” Waldert said in the statement. “These products represent an opportunity for asset managers with capabilities in the multi-asset-class space. Multi-asset-class solutions are one of the key ways in which asset managers are redistributing their intellectual capital to compete against the continuing rise of passive products.”

For example, Empower Retirement’s Dynamic Retirement Manager, launched in February, blends features of a target date fund and a managed account. It automatically transitions participants in target date funds to a managed account once they reach an age designated by the plan sponsor.

“These investors typically have a larger balance, justifying the need for personalized advice,” Cerulli noted in the report, and “they have a better sense of their retirement plans than an accumulating investor in their 20s or 30s.”

Evolution of Income Options

Cerulli found that almost half of mega plan sponsors believe it’s better for participants if they leave their 401(k) assets in the plan when they retire and draw directly from the account rather than roll assets into an IRA or annuity. However, Cerulli wrote, “the 401(k) platform is woefully ill-suited to be an income platform.”

Flexibility in plan design and product development both need to be improved before 401(k)s can become efficient income platforms for retirees. Almost all plans are designed so that participants can’t take systematic or ad hoc withdrawals, Cerulli found, and less than half of sponsors said they have a retirement income option. Income options were more prevalent among mega plans, Cerulli found.

TIAA has created two products to help transition plan participants from accumulation to decumulation, according to Cerulli, by periodically allocating assets to a fixed annuity or Treasury Inflation Protected Securities.

— Read DOL Tries to Clarify QDIA Regs on Annuities in TDFs on ThinkAdvisor. 


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