Newport Beach, California (April 15, 2019) – Nearly two-thirds of the largest and mid-sized 401(k) consultants and advisors believe plan sponsors want to retain and continue to serve individual savers once they retire, up 14% from the previous year, as aging Baby Boomers confront the challenge of managing their savings once they enter retirement, according to the 13th Annual Defined Contribution Consulting Study published by PIMCO, one of the world’s premier fixed income investment managers.   

PIMCO surveyed 32 large and mid-sized consultants and advisory firms representing 3,750 clients with over $4 trillion in plan assets as part of a larger study the firm undertakes to help plan sponsors understand the breadth of views and consulting services available within the defined contribution retirement market. PIMCO will publish additional results from the larger study later in the year.

The study also found that two-thirds of large and mid-sized consultants and advisors (66%) recommend that plan sponsors offer a retirement income tier to serve retirees, populated with a variety of retirement income solutions as opposed to a single all-in-one solution. In addition, they cited adding distribution flexibility (84%), providing access to education and tools (41%) and adding retiree-focused investment options (38%) as key strategies to retain DC plan participants once they’ve reached retirement.

In terms of retirement income design, large and mid-sized consultants and advisors recommend both single and multi-asset solutions, with limited support for insurance guarantees. Over three-quarters (78%) prefer an equity exposure of less than 40% at retirement, while tolerance for drawdown risk declined further compared to last year (8% versus 10%).  Nearly three-quarters (72%) recommend monthly distributions, while all of the consultants and advisors preferred a distribution yield greater than 4%. 

“We are starting to see a definitive shift in sentiment across the DC landscape as plan sponsors seek to tailor plan offerings not only to serve those currently saving for retirement, but also those who are already in retirement,” says Rick Fulford, Head of PIMCO U.S. Defined Contribution.  “Empirically, retirees demonstrate a propensity to spend only from available income, while preserving account balances, so we’re not surprised by the emphasis on income generation and capital preservation as it relates to retirement income option design.” 

The study also found a significant shift in plan sponsor priorities, with most large and mid-sized consultants and advisors now ranking reviews of target date funds as the highest priority (63%), followed by evaluation of investment fees (44%) and administration fees (28%) and simplification of investment menus (25%).  For plans of $1b or less, the preferred target date design is a packaged blend strategy that combines active/passive management compared to pure passive or pure active, while custom solutions are most recommended for plans over $1b in size.  Nearly all of the consultants and advisors believe an active management approach for U.S. bonds (100%) and non-U.S. bonds (97%) is important. 

“Increased advocacy for blend target date strategies reflects the active/passive management philosophy of most consultants and acknowledges a plan sponsor’s fiduciary duty to ensure reasonable fees.  We believe the blend approach represents the future of the target date industry and we are seeing migration of clients from both fully active and fully passive target date approaches,” says Mr. Fulford.

Other findings from the survey:

• Large and mid-sized consultants and advisors believe that glide path structure is the most important factor in evaluating default strategies (84%), ahead of fees (56%).
• 31% of large and mid-sized consultants and advisors believe the costs of managed accounts are justified, with only 6% believing managed accounts deliver superior performance to target date funds.  Over half (53%) recognize the value of customization; however a smaller portion (37%) believe participants provide the necessary information allowing for that personalization.
• Large and mid-sized consultants and advisors believe superior portfolios can be achieved through the use of custom and white-label strategies (62%), especially for fixed income (41%) and equity allocations (44%). 
• Within core menus, large and mid-sized consultants and advisors recommend two fixed income options excluding the capital preservation option.  97% recommend a core or core plus strategy, followed by 47% of consultants recommending an income focused/multi-sector bond strategy.
• Environmental, Social and Governance (ESG) strategies are recommended by over a quarter (28%) of large and mid-sized consultants and advisors as an additional strategy to consider within the core line-up.

About the Study

Now in its 13th year, the PIMCO Defined Contribution Consulting Study, formerly the DC Consulting Support and Trends Survey, seeks to help consultants, advisors and plan sponsors understand the breadth of views and consulting services available within the defined contribution (DC) marketplace. This year’s study was expanded to include a more diverse set of respondents across the spectrum of the DC industry’s consultants and advisors. Our 2019 study captures data, trends and opinions from 238 consulting and advisory firms, as well as individual plan advisors, who serve over 109,000 clients with aggregate DC assets in excess of $4.9 trillion.