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“The future belongs to defined contribution,” says aiCIO’s founder Charlie Ruffel—something, perhaps, that is not music to the ears of a defined benefit (DB) focused magazine, but also not factually incorrect. Indeed, it is this very fact—that the future of retirement savings lies in defined contribution (DC) assets—that makes it all the more important for our DB readers to be aware of trends in the DC space, and help out when need be. Let me explain.
The evolution toward DC, clearly, is a given: even American public plans, which are so devoted to their DB architecture, are likely to trend toward DC as their liabilities become even more unmanageable. Another given is that within the DC world, as a result of marketplace development and regulatory changes, the time has come for target-date funds to thrive. But who is going to help design customized target-date funds for the nation’s largest DC plans? Chief investment officers and their teams, of course—often in conjunction with growing groups of talent on the DC side of the pension equation. Thus, we have devoted a roughly 2,300-word feature on the topic within the pages of this edition of aiCIO.
As we write, reality shows that it is no longer about participants choosing their own retirement investments, as history thus far has shown that method to be increasingly ineffective. Instead, participants will be defaulted into a target-date option. In late 2010, consultant McKinsey & Company asserted that target-date funds are expected to capture $1.7 trillion worth of asset flows and account for 60% of all DC assets and revenues by 2015. The big question for the industry now becomes whether large employers will increasingly avoid off-the-shelf target-date funds and pursue the custom alternative. As we put it in the article: “Boeing, even in the mega-plan space, is something of an outlier in the resources it has been prepared to bring to bear on its defined contribution and defined benefit plans. There will be plenty of talk still about custom target-date solutions, and the consultants will push customized solutions until their last breath. But the truly powerful players in the space—the likes of BlackRock, JP Morgan, PIMCO, and the revamped Fidelity global asset allocation effort—all seem to be moving in the same direction. They’ll talk custom, but they’ll look to deliver scalable solutions.”
One thing is clear: With these trends unfolding for corporate plan sponsors, it is imperative that particularly large plans with sizeable investment staff create such funds for their participants—an endeavor that requires a substantial amount of work. So, from the perspective of a plan sponsor who oversees a big corporate pension plan, the opportunity to add value for employees’ future retirement needs is to create the very best target-date fund possible. Well-established, large investment teams at corporate funds—Boeing being a prime example—will be best positioned to advise on this. It is thus essential that corporate CIOs and their teams understand what they might be—or already have been—called on to do.