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before, you no longer can, considering this environment.
Holly Verdeyen, U.S. defined contribution leader at
Mercer in Chicago, says the process of plan menu evaluation
typically can take place over three quarterly meetings:
The first focuses on education, with the adviser sharing
his outlook for inflation and what it could mean for plan
participants. In the second, he discusses different fund and
manager options, including those already in the plan, and
votes on any potential changes; in the third, the committee
implements the changes.
If a target-date fund is the qualified default investment
alternative, it deserves additional attention, Rivera says.
Plan advisers should be helping their clients look under
the hood of their target-date funds to make sure they are
designed for resilience in the current fiscal climate.
" Most target-date funds do have some asset allocation
to inflation-sensitive options[-i.e., assets for which the
price generally increases during an inflationary period], "
Verdeyen says. " If the plan sponsor has 60% of its population
in a target-date fund, and it has a healthy allocation to
an inflation-sensitive option, it may or may not need to add
an inflation-responsive option to the core menu. "
Understanding the plan's demographics and overall allocation
is the first step to making that decision, she says.
Steve Beck, vice president, portfolio engineering at
Fidelity Investments in Boston, agrees it is important for plan
committees to scrutinize the investments in their targetdate
fund. " The glide path should be suitable to a QDIA,
and it should include a broad range of asset classes, built to
perform well regardless of market conditions, " he says.
Near-Retirees and Retirees
" While all participants will feel the impact of inflation, it's
the near-retirees and retirees who are the most vulnerable
and are the most inflation-sensitive group, " Verdeyen says.
" They have nonexistent or little opportunity for wage growth
and a short time horizon before they start spending. "
In some cases, advisers might want to talk to plan sponsors
about steering older workers toward multi-asset portfolios
or suggest one with a higher allocation to Treasury
inflation-protected securities or real estate, Verdeyen says.
" Plan sponsors just want to think about how the current
investment options affect their specific participant population, "
she says.
Most 401(k) menus tend to focus more heavily on equity
funds than fixed income, with equity dominating by a margin
of three to one, according to Janus Henderson Investors.
Given today's inflationary environment and the unique
challenges it poses for fixed income, it might be worth
taking a closer look at the fixed-income portion of the plan
menu, Rivera suggests.
That said, the recent interest rate increases were widely
expected, and most fixed-income fund managers had baked
them into their strategy, says David Eichorn, CEO and head
of investment strategies at NISA Investment Advisors LLC,
in St. Louis. " While there have been price losses in bond
funds, they're actually generating meaningful income for
the first time in a while, " Eichorn says. " So, they're attractive,
and, as interest rates go up, that drives institutional
flows into fixed income for the higher yield, so we're seeing
them as a more attractive asset class. "
Building Blocks Remain the Same
While rising interest rates, higher inflation and stock
market volatility pose new challenges for asset managers,
the key components of a successful plan menu have not
changed, Beck says. For him and his team, those building
blocks include: broad market coverage; high diversification
potential, including negatively correlated options; sufficient
choice; and a straightforward design that is easy to use.
" We've been talking
about market volatility,
but inflation is new for both
advisers and clients. "
In this market, though, he says, advisers must also work
with plan sponsors to conduct thorough due diligence on
the asset managers they select within that framework.
" Manager due diligence is even more critical in these
times because the dispersions of returns may be higher in
certain asset classes, " Beck says. " There's an opportunity to
pick winners and avoid losers. So there's an opportunity for
plan sponsors to not only get the asset allocation and the
offering right, but also to select the right manager. "
Setting Expectations
Even if no changes are necessary, advisers might take this
as an opportunity to level-set expectations with plan sponsors,
Collinson says.
" You want to make sure that plan sponsors have a basic
understanding of inflation and what the potential implications
of inflation are, so they are sufficiently knowledgeable
and can be asking good questions and making informed
decisions about the plan, " she says.
Then, advisers can take a closer look at the lineup with
their sponsor client to make sure it understands the potential
performance of the investments that might be susceptible
to inflation-and can communicate that to plan participants,
if necessary.
Despite current market conditions, plan sponsors that
work with Alight Solutions largely have not been making
big changes to their investment lineup, says Winfield Evans,
the recordkeeper's vice president of investment solutions
and strategy in New York City. " Roughly 10% or less of our
clients have used a dedicated fund that offers investment
protection, " Evans says. " And we have not seen an upsurge
in plan sponsor interest. What investors really need in their
plan is an all-weather portfolio. " -Beth Braverman
planadviser.com May-June 2022 | 35
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