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Plan Professionals Support Greater Diversification and Customization of TD Strategies

Fee pressures continue to be a dominant force in shaping the future of target date (TD) solutions as evidenced by the top two most supported developments identified by T. Rowe Price’s just-released defined contribution consultant research study. 

When asked to indicate the extent to which they support certain enhancements and modifications related to TD solutions or other qualified default investment alternatives (QDIAs), TD solutions offered in a collective investment trust (CIT) and those utilizing both active and passive underlying strategies received top billing. 

With respect to target date diversification, adding exposure to nontraditional bonds garnered the most interest from DC consultants. Meanwhile, despite the recent inflationary environment, the study further reveals only moderate support for adding or increasing allocations to traditional inflation-sensitive strategies in TD portfolios.

The firm’s third annual 2023 Defined Contribution Consultant Research Study is based on the viewpoints from 32 of the nation's leading consulting and advisory firms—with a collective $6.7 trillion in assets under advisement. The study explores factors driving plan sponsor decisions as they relate to TD solutions, retirement income, investment trends and financial wellness programs.

Retirement Income Shift

Another striking finding from this year’s survey was DC plan sponsors’ shift in sentiment with respect to in-plan retirement income solutions. “On the whole, we observe plans evolving from an exploratory to a decision-oriented stance,” explains Jessica Sclafani, Defined Contribution Specialist at T. Rowe Price. 

In this case, T. Rowe Price notes that its 2021 DC Consultant Study showed consultants describe 59% of clients as “having no stated opinion” on in-plan retirement income solutions; now in 2023, only 24% of clients said the same. 

What’s more, the firm’s data shows the percentage of clients that consultants categorize as currently offering or planning to add a retirement income solution has more than doubled, from 8% of clients in 2021 compared with 19% in 2023. 

Despite increasing retirement income product proliferation, survey respondents identify a simple systematic withdrawal capability as the most appealing strategy or solution for the delivery of retirement income.

Shaper Focus on Fixed Income

Meanwhile, the evolving fixed-income landscape has made it necessary for many consultants to sharpen their focus on the asset class, the study notes. To that end, 78% report a greater focus on identifying opportunities for diversification within fixed income, whether it is across the credit spectrum or global yield curve, as well as by method of implementation (active or passive). 

Fixed income is also where respondents express the greatest conviction in active management. At least half of respondents selected active management as their preferred method of implementation for core plus bond/multi-sector, corporate bond (investment grade), international or global bond, low duration bond, and high yield bond strategies.

“Ongoing market volatility and economic uncertainty are driving changes in the retirement landscape, creating obstacles for the intermediary community, but also evolutionary opportunities for DC plans and consultant and advisory practices,” notes Michael Davis, head of Defined Contribution Plan Specialists at T. Rowe Price. “Fixed income markets are a perfect example—with tightening monetary conditions, higher interest rates, and inflation, it is not surprising that 62% of consultants and advisors surveyed agree with the statement, ‘fixed income oversight for DC plans now requires more consideration than it did in prior years.’”

“An important learning from this year's survey was that the current market environment has created a unique opportunity for the industry to expand the way it thinks about offering participants exposure to fixed income, and more specifically, the types of fixed income made available—whether it's in a standalone investment or in multi-asset investment option,” added Sclafani.  

The DC specialist further observes that fixed income has historically not received the same mindshare as equities, but amid the current interest rate environment, and with many plans experiencing an aging workforce, the time might be right to talk about fixed income in DC plans. 

Investment and Wellness Trends

Study respondents also generally approve of the use of both active and passive investment strategies in DC plans overall. Most preferred both active and passive investment options for large-cap equity, small-/mid-cap equity, and international equity. Notably, more than half (52%) of respondents believe emerging markets equity is best implemented using active management.

Additionally, the research showed, not surprisingly, that the primary motivation for plan sponsors to invest in financial wellness programs came from the desire to improve worker satisfaction and retention and reduce employee financial stress. 

The topics that mattered most to respondents were improving overall financial knowledge and estimating retirement income needs—with 43% and 54%, respectively, believing that the importance of these issues has increased over the last 12 months.