There are rumblings of a tectonic shift in the defined contribution market that may fundamentally change the way plan sponsors and retirement plan professionals (RPPs) think about everything from investment menus to plan design.
Retirement Income is the New Benchmark
One of the most profound trends is in how plan participants, plan sponsors, and policy makers view defined contribution plans. They are being seen less in terms of a vehicle for accumulating retirement savings and more as a medium for generating retirement income. This may sound like semantics, but changing perceptions may drive changes in needs and expectations.
For example, in a retirement universe whose language is framed in retirement income, plan sponsors will strive to offer a retirement platform of products, solutions, tools, and services designed to create sustainable income plans for participants near, entering, or in retirement. Younger Millennial and Gen Z workers, who may have little faith that Social Security will be a lasting source of future retirement income, will also need a retirement plan with an income focus. Policy makers are pushing this reframing forward, as evidenced by the enactment of the Setting Every Community Up for Retirement Enhancement ( SECURE) Act, which requires lifetime income calculations to be included in participant statements, and also offers a “safe harbor” pathway for plan sponsors to add guaranteed lifetime income options.
Retirement plan professionals will need to be responsive to this looming transition (and in many cases anticipate it) with their plan sponsor clients, offering ideas on education, tools, plan design, and investment menu options that can address retirement income in a more strategic way.
Multiple Forces Redefine the Investment Menu
We expect a number of factors will boost interest in conducting a comprehensive review and overhaul of the investment options typically offered by plan sponsors today, including:
- When retirement readiness is measured by income generation, the demand for much more robust fixed income offerings will likely emerge—as well as a wider use of lifetime income annuities.
- The global pandemic has served to remind plan participants of the risk in equity markets and how quickly retirement readiness can evaporate. This experience will likely drive the demand for a more extensive and diversified range of investment options, such as alternative investments, hedge funds, a more varied bond investment selection, real estate, and private equity. Meeting this demand may be accomplished either through expanding the roster of individual fund choices or through the addition of such asset classes into a plan’s target date fund offering.
- We believe target date funds will need to evolve to accommodate a retirement income orientation and desire for broader market exposures to help mitigate risk. One-size-fits-all target date funds will likely give way to customized, more intelligently crafted target date funds that offer wider investment opportunities and more effective risk mitigation.
- As Millennials and Gen Zers continue to age and speak with more influential voices in regard to plan design and features, retirement plan professionals should expect growing pressure to offer funds that incorporate Environmental, Social and Governance (ESG) criteria into their investment decision-making. Given the lack of standards for grading adherence to ESG principles, plan sponsors will look to the retirement plan professional as a key resource in helping determine the elements of an ESG-oriented investment menu. This will require that retirement plan professionals stay current on the latest trends with ESG and sustainable investment options, as it may become a central factor in a plan sponsor’s decision of which retirement plan professional to work with.
Value and Advice Grow in Importance
Finally, we believe that the singular focus by many plan sponsors on lower costs and passive investing is evolving, with a growing appreciation for value and advice. Competitive forces have ensured that lower expenses are a given, but plan sponsors recognize that there are other priorities that must be addressed if they want to help their employees achieve financial security.
Illustrative of a plan sponsor’s need for advice, the SECURE Act authorized the creation of a new type of retirement plan designed for use by multiple, unrelated employers. These new pooled arrangements, known as pooled employer plans (PEPs), create a new opportunity for retirement plan professionals to add value to their plan sponsor relationships. Plan sponsor interest in learning more about PEPs may be high, owing to the fact that larger PEPs with scale may have lower administrative costs and reduced workloads for the employer. But plan sponsors will likely have concerns about the lack of control over plan design and benefit decisions, and they may have fears that a PEP’s potentially lower service levels and pre-determined investment menu may lead to greater participant dissatisfaction. Retirement plan professionals are in a good position to guide plan sponsors through this important decision.
Important Information for BNY Mellon Custom Target Date BuilderSM
General. The Custom Target Date Builder is designed to help financial professionals assess how custom target date portfolio models may be built for their defined contribution plan clients. Unlike a target date fund product that invests in a fixed set of funds that do not vary by plan, a custom target date portfolio model uses the actual fund options included in a plan’s particular investment menu. This online tool may be used to create hypothetical custom target date models that are comprised of portfolio allocations for plan participants with different target retirement ages based on a proposed plan menu that you select for the plan. The proposed fund menu must meet certain asset class requirements, and at least two BNY Mellon fund options must be included. You will also be asked to choose from 5 different levels of risk for the model’s glidepath.
Powered by Wilshire. Based on this information, hypothetical custom target date portfolio models will be generated using the glidepath methodology of Wilshire Associates Incorporated (“Wilshire”). The Custom Target Date Builder is distributed by BNY Mellon Securities Corporation (“BNY Mellon”), a registered broker-dealer and a BNY Mellon Investment Management firm. Wilshire has been engaged by BNY Mellon to develop this online tool on its behalf. The Custom Target Date Builder does not provide investment advice, and BNY Mellon and Wilshire are not acting as fiduciaries under this online program. For purposes of determining the proposed fund menu, financial professionals may choose from the plan’s existing fund options or any other option from a universe of available funds. However, only those funds that have been pre-screened by Wilshire will be selected for asset allocation in its models. Additionally, fund options from Wilshire’s list of preferred funds that have passed its investment manager due diligence screens (the “Focus List”) generally will also be selected for asset allocation. The mere fact that a fund has been placed on Wilshire’s Focus List, or is otherwise selected for asset allocation under its models, should not serve as the primary basis for any plan investment decisions. Any fund (including its share class) that is available for selection for the proposed fund menu may or may not be accessible through the plan’s existing recordkeeping platform.
Educational Purpose. The hypothetical portfolio models that are generated by the Custom Target Date Builder, including any Focus List funds or any other funds selected for asset allocation under Wilshire’s models, are intended to be educational, and they are not tailored to the investment needs of any specific plan or plan investor. The funds or proposed funds that are included in the portfolio models represent just one way that a diversified portfolio may be constructed and not the only way to construct a diversified portfolio. Accordingly, the portfolio models including any funds selected for asset allocation should not serve as the primary basis for any plan investment decisions, and the portfolio models generated by this online tool should not be shared with plan participants. The provision of this hypothetical portfolio model information including any funds identified from the Focus List do not obligate Wilshire or BNY Mellon to provide any such information on a regular basis.
Portfolio Model Providers. The plan client/fiduciary does not have an agreement with Wilshire (unless they have engaged Wilshire to provide the “3(38) Investment Manager” Services for Model Portfolios). Plan fiduciaries should carefully research any potential fund or portfolio model before making an investment decision, and other funds or portfolio models with similar risk and return characteristics may be available. If a plan client wishes to implement any custom target date portfolios, Wilshire or another 3(38) portfolio model provider should be hired by the plan client. Unlike Wilshire, other 3(38) providers may be unable to implement custom portfolios unless they are also hired to select the plan menu.
BNY Mellon’s Custom Target Date Builder does not provide fiduciary advice with respect to the construction of portfolio models, or the selection of 3(38) portfolio model providers for plans.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Investors should contact a financial professional or visit im.bnymellon.com to obtain a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.
All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks.
An investment in a target date strategy does not eliminate the need for an investor to determine whether a strategy is appropriate for their specific financial situation. An investment in a strategy is not guaranteed. Investors may experience losses, including losses near, at, or after the target date, and there is no guarantee that a strategy will provide adequate income at and through retirement.
Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
Bank-maintained collective investment funds and their units are not registered under federal and state securities laws in reliance upon applicable exemptions. Because these funds are not mutual funds, they are governed by different regulations, restrictions and disclosure requirements. For example, these funds are subject to banking and tax regulations which, among other things, limit participation to certain eligible qualified retirement plans (stock bonus, retirement, pension and profit sharing accounts) and governmental plans.
The tool will require a minimum of two BNY Mellon Investment Management investment options be included among up to 18 strategy allocations in the target date portfolio.
The use of the tool is subject to Wilshire’s User Agreement.
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
BNY Mellon and Wilshire Associates are not affiliated entities.
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