MASTERCLASS: Target Date Funds - November 2018

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  • 54 mins 12 secs
With the multitude of investment options available, savers are faced with challenges of where to rebalance all while trying to increase their retirement savings. Three Nuveen experts come together to discuss the options available to savers, Target Date Funds and the golden years.

  • Christine Stokes, MD - Head of Retirement Practice Management at Nuveen

  • Jeff Eng, MD - Head of Retirement Product Management at Nuveen

  • John Cunniff, MD - Target Date Funds Portfolio Manager at Nuveen

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MASTERCLASS

Laura Keller: Thanks for joining us here at Asset TV in New York, I’m Laura Keller.  Savers could just go dizzy trying to parse through all of the investment options available to them as they try to increase their retirement savings, they really could, equities, bonds, commodities, real assets.  And thinking about where they should rebalance, when they should rebalance, well, that’s where the real trouble comes in.  We have asked three Nuveen experts to walk us through an option available to most savers.  They’ll share much more about Target Date Funds and gliding into the golden years.  Welcome to the Asset TV Masterclass here in New York.  Thank you all for joining me, I really appreciate your time.  And this is probably a great time for us to be talking about Target Date Funds, just given where the markets have been this last week and a half.  Maybe, John, you can start us off, just thinking about, you know, the outlook for Target Date Funds and the need for them.

John Cunniff: Sure.  The past couple of weeks have highlighted rising interest rates, investors concerned about the impact on the economy, concerns about potential trade tariffs and their impact on earnings.  The positives are we’re going into earnings season, earnings are expected to be very strong.  And if we look even where interest rates are today, the S&P 500 year to date is still up positive 5% or more and vary of course day-to-day, but there’s a lot of positives.  The important thing is a Target Retirement Date Fund that’s professionally managed, as a thoughtful glide path, diversified, that’s a great investment in all market environments, especially today when markets are volatile.

Laura Keller: Now, volatility really brings some questions into people’s minds.  But the Target Date, you are thinking as the way to go with that?

John Cunniff: Yeah.  Morningstar did a study a few years ago and they compared how individuals performed on a dollar basis, how they invested in different areas and one was Target Date, and the other was individual equity funds.  And on average the Target Date investors did better because the timing element of it was taken out.  So individuals that are investing in individual equity funds sometimes will do well and sometimes they won’t.  But on average, unfortunately, they underperform, the Target Date group as a whole, so that highlighted the importance of having that professional asset allocation.

Laura Keller: And, do you know, just real quickly on that, did they pull money in and out of the equity funds, was that part of it too?

John Cunniff: Yes.  The return element was on a dollar basis.  So the impact of the individuals trading, of course some would do better than professional management, but on average, the professionally managed Target Retirement Date Funds outperformed as a category on an asset basis.

Laura Keller: Interesting research.  Jeff, what trends are you seeing these days?

Jeff Eng: Yeah.  One of the big benefits of the Target Date Funds is that it provides, not just the professional management, but the broad diversification for those participants.  I think one of the things that you mentioned right at the onset is for plan participants when they’re looking at the core line up, there are all of those different investments.  There’s the different large cap growth, large cap value, small cap, international, the different fixed income funds.  Well, how do they decide how to allocate across all of those different investments?  And Target Date Funds are great because you have managers like John who take a look at it, understand how those investments work together, what their correlations are and then determine what the right mix is for them based off of their time horizon to retirement and then through retirement as well.  But one of the things that we’re seeing as a new trend is, it’s not just a matter of diversifying across stocks and bonds.  We’re seeing a new trend whereby certain Target Dates are now starting to look at alternatives, so going beyond stocks and bonds, looking at commodities, listed infrastructure, REITs, direct real estate.  The issue though for a lot of those is how do they balance the higher fees associated with those alternatives with the benefits of the diversification that they provide?

So, one of the things that’s really important as advisors work with their plan sponsors to take a look at those types of funds and those investments is what’s the experience of the provider in being able to manage each of those asset classes, how have they combined it?  What is their historical track record in being able to combine those things together?  And then the balance of, yes, that looks great from a risk return standpoint, but is it at a reasonable fee?  So I think that’s important for advisors to look at when they’re taking a look at those things.

Laura Keller: Well, and picking up from the advisor side, I mean Christine, that’s who you really do work for day in, day out.

Christine Stokes: Right.  So we are seeing advisors look more critically at the Target Date Fund providers and at the glide path design.  And in fact, 77% of advisors have recently stated that glide path design is the key component when they’re selecting a Target Date Fund provider.  So they are not just looking at the performance and the fees anymore, they’re really doing a deeper dive on the due diligence to look at what is that mix of equity bond and any alternatives or diversifiers that are in the glide path.  What is the process that the Target Date Fund managers take to get to that mix of equity and fixed income and alternatives?  And then how did the Target Date Funds perform in the context of the fees and the market environment and the assumptions that the glide path manager made to get them to that point?  So they’re really pulling back the covers and doing a deeper dive on what the construct is in their Target Date Fund providers rather than having just a pure laser focus on what the fees have been.

Laura Keller: Right, which is a one singular way, one prism to look at it in.  But when you see them doing this do they have … I mean are they themselves doing that work or is there a fund, you know, or a firm coming up with some set parameters that they like to see?

Christine Stokes: There are multiple ways and multiple parameters depending on the fund company that you’re working with.  What you really want to try and do is work with your partners to develop an unbiased approach, but that process and that approach is key as a fiduciary.  So, ERISA is really a process based regulation where your method for getting to your outcome is just as important as what your outcome is and the documentation of that is really critical.  So they are working with their providers, but they’re also understanding what the key components are with their plan sponsors.  And what the plan sponsor’s philosophy is around their Defined Contribution plan design and really making sure that they match the expectations of the plan sponsor with the participant profile to really understand what the glide path looks like and how it will serve and enhance the outcomes of the overall participants of that plan.

Laura Keller: Yeah.  And that seems a little bit like they’re able to get some feedback from what the plan sponsor wants, not just a one size fits all.

Christine Stokes: Absolutely.  DC is really, it’s evolving, it’s evolving from a supplemental savings plan to more of a, you know, the primary savings vehicle for retirement to now, you know, we can get to even savings and income planning for retirement.  So as that evolves, the plan sponsors will have their own thoughts and opinions, the plan design and the outcomes that it’s meant to serve for their participants.  And advisors really need to match that up with the Target Date provider that they’re choosing.

Laura Keller: Well, and this choice, I mean this is really the name of the game here, whether you’re thinking as the individual saver, you don’t have to make the choice or as the advisor that you’re helping to go through with that.  And obviously, John, you’re on the portfolio management side.  And you were talking about this sort of active versus passive.  And I’d love to just get your perspective on why it’s so important to have that active manager really going through and helping to select these investments.

John Cunniff: Well, broadly there’s two groups of Target Retirement Date Funds, and active competitors and index competitors.  And starting with the index competitors, the most important thing to know is that the glide path which is the asset allocation, how that changes over one’s lifetime, that’s an active decision for every index provider.  So as Christine highlighted, the due diligence and research that’s needed to really understand how that was arrived at, and they differ from one to the other, they have different total equity rates, total risk at different parts of the glide path.  Some have more in REITs than others, there’s a lot of decisions underneath that need to be looked at.  So every index provider is not the same in Target Date, the benefits of an index or transparency, and then generally on average, lower fees.  However, the drawbacks are a lot of the positives of the active group of Target Retirement Date providers and this includes more generally more diversification with different assets, different approaches to investing actively, within fixed income generally more diversification with high yield for example, emerging market debt.  And then some additional real assets such as direct real estate or other investments like that.  And as well, actively managed portfolios generally can have tactical asset allocation.  So can make shifts at the margin during volatile markets.  So those are some of the positives of active Target Retirement Date Funds.

Jeff Eng: And I think just to add to John’s comments there, while there are active Target Date Fund providers and then there’s the all passive Target Date fund providers.  There’s also from a new trend we’re seeing more and more of is actually a blend where new providers are coming out with an active passive Target Date Fund and to John’s particular point, there is a lot of benefits and there are a lot of plan sponsors and advisors when they’re taking a look at it, they like active management because of the ability to prevent the declines in the volatile markets.  If you take a look at most of the active fixed income capabilities that are out there, especially year to date they’re typically outperforming the all passive fixed income because of their ability to manage those investments, especially in a rising interest rate environment which we’ve seen this year and potentially are expecting to see over the next 12-18 months.  So, from that particular perspective, is there a way for plan sponsors working with their advisors to say, “Okay, well, we like active management, but we realize that from a fiduciary standpoint they may be concerned about the fees for active management.”  So what’s the next best thing is particularly balancing active management with passive management so that way you get the ability to protect on the downside, the ability to potentially increase the returns by generating additional alpha with active management.  But you’re balancing it with reasonable fees by including index management within it.

Christine Stokes: If you think about the glide path and you think about where the bulk of the fixed income allocations are, it’s toward the near dated portfolios, those that are closer to retirement.  And those are typically the older population, the near retirees, and they typically have the highest account balances.  So you really need to do your due diligence to understand how you protect those assets, how you optimize those assets and maximize them at the same time for increased longevity that we’re all seeing and that we all know is happening, especially at times like this where we have rising interest rates and we have market volatility.  So it’s really critical to understand and anticipate how your Target Date Fund providers are going to perform in different market environments so that you understand the impacts on your participants.  And you can hold managers accountable for how they say they’re going to perform.

Laura Keller: Right.  Well, and I’m glad you brought up about the specific Target Dates because dealing again with advisors and therefore the retail side a question that I often get, it’s a very one-on-one question but people wonder.  Well, should I actually choose a retirement date but I expect to retire or should I be choosing it more like when I’m actually going to take the money out?  I don’t know.

Christine Stokes: You really want to focus it based on your age and your assumed retirement date.  And a lot of the reason is because of longevity but also because as you age, we have found research that shows that participants become more active and engaged in their planning as they get closer to retirement.  So you really want to do your best to optimize the risk and return of your expected Target Date Fund provider, of your Defined Contribution account until you get to that point where if situations change for you personally 10-15 years out of retirement and that’s when you truly, you know, you being the participant, that’s when the participant truly starts to engage, then they can make those choices for themselves.  But for the most part what we have found is that inertia takes hold of the participants, they really aren’t that engaged, and to the point that John made before, if they are engaged, a lot of times they’re underperforming the portfolios of the professionals that are managing the Target Date Funds.  So you do really want to stick with, especially at the beginning in the earlier years of your career where it’s a pretty generally applicable truth to say that salaries are low, account balances are typically low and people can take on a significant amount of equity risk.  So you really want to optimize that and maybe to your point, as participants get closer to retirement, think about what they want to do to customize it.  But for the most part the glide path in and of itself as it’s meant to be and as it’s designed is best.

Laura Keller: To stick with that.

Christine Stokes: Yeah.

Laura Keller: And on that just a quick follow-up and really for you all.  I think the other thing that I hear a lot, again coming more from the retail side is, well, I don’t really know what the difference is between a retirement date of 2040 or 2045.  And if I’m not already using it as a I will retire at that 2045, people often come in to there, go out, you know, and kind of use it a little bit more, to John’s point, of sort of their own active management style.  What do you guys think about that, just any thoughts on that?

John Cunniff: Well, generally a Target Retirement Date series, it’s designed for a moderate investor, so for most.  And then as Christine mentioned, that’s generally what most people should do.  However, some people may have individual household decisions, they may have a partner who has a very higher risk job and then they may want to reallocate their assets and maybe move to a slightly different date.  But the general practice, the recommendation would be stick with your date, if you want to do other things you could also build a portfolio around that.

Christine Stokes: It’s going to be interesting to watch because a lot of the employees and participants that are invested in DC now weren’t necessarily defaulted into Target Date Funds.  So they may be selecting them based on plan menus and not fully understanding how to select them.  So it’s going to be interesting for us to see as this evolves and as more and more millennials come into the workforce to see how that impacts the flows of Target Date.  And it’s expected to increase them significantly, so by 2021 we’re expected to see Target Date Funds capture 85% of Defined Contribution contributions.  And if you look now you’ll see that over 85% of … or under, those under 25m their account balances in Defined Contribution is invested in a Target Date.  And that gradually decreases over time as you would expect to the older generation of the workforce that was not necessarily defaulted into the Target Date Fund.  So I think that’s going to shift as the baby boomers come out of the workforce and retire and more of the millennials that are taking part in the default or re-enrolments into Target Date will grow.

Jeff Eng: Yeah, because I believe, and, Christine, you can correct me if I’m wrong but a lot of the studies have shown that when plan sponsors take advantage of the Pension Protection Act, which, you know, a lot of folks call the PPA and the ability to automatically re-enroll participants into their Qualified Default Investment Alternative or their QDIA that a lot of times the participants don’t say, “You know what, I don’t want to be in that Target Date Fund.”  They get re-enrolled, they get put into the Target Date Fund and they stay there.  And then with this market volatility that we’ve seen over the last week, you don’t necessarily see participants shifting out and selling out of it and then buying other things only to potentially lose out on the upswing.  So by being in a well-diversified portfolio where they are handing it off to professionals, they don’t have to worry about it, it’s well diversified, it’s providing for a better outcome, to the points that John had made before where studies were shown, participants left to their own devices, unfortunately they would have seen the market volatility last week and then maybe be fearful then sell out of their growth or their risky assets only to then be left behind.  So they would have been selling at low and then if they want to now buy back in they’re buying high, which is the exact opposite of what they want to be doing.

So the Target Date Fund helps to alleviate a lot of that and as Christine had mentioned, it’ll be interesting to see as that continues and more and more plans do re-enrollment and so that’s something that I think a lot of advisors that are out there, hopefully they’re talking to their plans, they’re doing due diligence in terms of looking at working with a record keeper to look at how their plan participants are actually invested and saying, “Hey, you know what, maybe we added this Target Date Fund, 5, 6, maybe even 10 years ago and maybe they did a re-enrollment at that particular point.”  And they’re doing auto-enrollment now but maybe there’s participants who had left and so forth.  And they take a look at it and they don’t have that high of a percentage of participants who are in the Target Date Funds.  You know, that would be something they should take a look at and determine with their plan sponsor, should they do a re-enrollment and get more of those participants into it because then, you know, that hopefully will prevent a lot of the potential issues of having these participants trying to figure it out themselves.

Laura Keller: Yeah.  And I mean whether they’re thinking about re-enrollments or really otherwise, we almost seem to be arguing that people should have a lot of their money in Target Date Funds.  Is that what you recommend, that really the bulk of the retirement savings is managed through a Target Date Fund or should that be a mix in a larger portfolio?

Christine Stokes: From my perspective the Target Date Fund is the optimal mix, it’s balanced by professionals, it’s managed by professionals, based on an average participant profile.  And it really does take into account the current market volatility, current market environment in a way that the average participant isn’t able to.  And it’s able to reflect that in the portfolio construction and the underlying diversification.  So I think it is optimal for the average, as you mentioned before, participant to really be invested in the Target Date strategies.

Jeff Eng: And I think, I concur with Christine, the Target Date Funds really, to kind of steal a phrase that a lot of folks use out there in the industry, is a do it for me solution.  So automatically putting the participants into a well-diversified portfolio, that automatically takes and readjusts based off their biggest risk factor which is their age and time horizon to retirement.  But one of the things that I think is also not necessarily discussed enough is the fact that Target Date Funds are designed to help get participants through their working years to get them to retirement.  But at the end of the day, what is it for?  Well, the DC plan in terms of saving and investing is to help them to save and invest to generate income in retirement.  A lot of folks unfortunately, we’re not going to have the Defined Benefit plans anymore, the DC plan will become the primary source of retirement income for most of these participants.  So it’s very important that they also take a look and understand whether or not their Target Date Fund is designed to help them provide retirement income.

I know when we take a look at our Target Date Funds a lot of participants who are utilizing it and are now retired, they’re taking systematic withdrawals, right.  So they’ve appropriately saved and invested for retirement, they’re in retirement now, they’re taking prudent withdrawals from it so that way they can feel comfortable that this is going to be sustainable income for them throughout retirement.  And they don’t have to worry about the market risk, inflation risk associated with trying to figure out how do I manage that money?  And it gives them the flexibility of determining, okay, you know, I can take the money out based off of, you know, what I think my expenses are and managing that.  Now, again, each person is different, so it, you know, it would be great if they work with their advisor to figure out what the appropriate amount is and how to balance that across all of their assets.  But within the retirement account it makes it much easier for the participant if it’s in a single well diversified portfolio that’s professionally managed to help them do that, and that’s both to and through retirement.

Laura Keller: Right.  Well, and I guess then thinking about these different portfolios from John, you know, you manage them, I don’t know if it’s more difficult in this environment, but kind of picking off of what Jeff said, you almost have to have a specialty in how you’re managing these.  Because you are looking at it broadly but you’re probably managing more than one I would think.

John Cunniff: Well, we have 12 Target Retirement Date Funds in our family, one active and then another, an index, so we provide both.  As Jeff mentioned, the industry has evolved, when I started managing our funds 12 years ago there were fewer retirement funds available.  And so since then it’s been filled out where you have Target Retirement Dates now, past, you have a number of providers have through retirement glide paths so they continue gliding after the date of retirement.  Also other providers in addition will have an ending retirement income fund for their series that the other funds go into.  And at least in the design of our series, we consider both the accumulation, so individuals saving during their working years, and then taking systematic withdrawals, replacing a high fraction of their income with Social Security through retirement.  So the glide path is designed with the asset allocations and diversifications with all that in mind for the average investor.  There are some new product innovations that my panelists could touch on, which include, so today most are organized for taking systematic withdrawals.  So that will be up to the individual to take a certain rate and take that out and grow that with inflation during their retirement.

Some providers are starting to provide managed payout funds as part of their series.  So that would be an alternative that the individual could switch into and then a team would decide each year what rate is appropriate to pay out from their fund for their retirees.  And that rate would be dependent upon where interest rates are, market volatility, asset exposures, and expectations and then any demographic changes as well, not just with their participants but if people are living longer.  So all of that would be thought though and provided as a single income solution that way.  So the two approaches to that are either a systematic withdrawal, which is the traditional or also managed payout.

Laura Keller: And that’s something that you would have to manage then to figure out, you know, maybe, I don’t know what the percentages would be, perhaps 2% of a withdrawal per year?

John Cunniff: Well, the withdrawal rates will vary.  Generally advisors would say 4-6% or, you know, it’ll vary, and I’ll let my panelists touch on those specifics in the marketplace.

Jeff Eng: Sorry, if I could just add.  So typically, you know, the systematic withdrawals, a lot of studies have shown that a sustainable systematic withdrawal of 4-5% inflation adjusted will be appropriate for most retirees over, assuming a 25 or 30 year period.

Laura Keller: That’s 4-5% each year then?

Jeff Eng: 4-5% each year, and inflation adjusted as well, has a very high confidence level of being able to last over a 25 or a 30 year time period.  And that’s typically what a lot of retirees are doing when they’re leveraging the Target Date Funds and, you know, how the Target Date Funds are designed to being able to provide that sustainable income in retirement, which John was mentioning is kind of a new trend, there are some new product designs that are out there, around managed payout funds whereby they’re taking that element out of it for participants, instead of the participants or the retirees having to try to figure out shall I take 4%, 5%, 6%, what’s an appropriate amount?  It’s a mandatory payout so what they’ll do is they’ll say each month you’re going to get 4% or 5%.  And that’s determined by the manager of that particular fund and how they’re managing the assets, what the market environment’s going to be and so forth.  So, you know, that just reduces the element of decision making from the retiree of, okay, markets have kind of changed, should I adjust what my payout should be so that way it’s sustainable, match payouts, that eliminates it.  The drawback though is it reduces flexibility; right, you know, one…

Laura Keller: For the manager?

Jeff Eng: No, for the retiree because previously with systematic withdrawals as the retiree and my ability to taking systematic withdrawals, I have ultimate control, it’s full liquidity, I have ultimate control in determining how much I want to take out.  But the flipside of that is, yeah, I have control, but what is the likelihood of that being able to sustain me throughout retirement?  Do I really know how much I should be able to take out?  Now, if I’m working with a financial advisor, that’s great, I’m getting professional advice.  They understand my needs and my expenses and they’re going to help me manage that.  So the match payout is kind of a new innovation whereby maybe a financial advisor isn’t involved, the investor has lower assets so they’re putting it in there because now the professional money manager who’s looking at the overall fund and how the assets are being managed is saying, “Okay, based on the market environment, this is the income amount that I think is going to be sustainable for the investors within this particular fund.  And then they’re automatically going to pay that out.  So regardless of whether or not the participant wanted to use that money or they’re like, “You know what, I want to save up for something or maybe it’s a medical thing, so I don’t want to dip into those assets just yet or, you know, I need it now, so I’m going to take a little bit more out now and I’m not going to take it out later.”  They have that flexibility with the systematic withdrawals; they don’t have that flexibility with the managed payout funds.

Christine Stokes: Here’s what I would say for advisors though at this point, one, recognize that I think we’re at a turning point in Defined Contribution where we should no longer just think of it as a savings and accumulation vehicle.  We should think about it as a potential vehicle for those that retire as well.  Two, have conversations with your providers about how they are thinking about retirement income and how they’re factoring that into the management of the Target Date Funds and portfolios that they’re managing for Defined Contribution.  You know, educate yourself on the different perspectives out there.  And then I think the tangible takeaway from this turning point, most for advisors and plan fiduciaries is to not dive into product evaluation, but to look at the plan design and to understand how the investment policy statement is currently stated today to account for distributions.  What types of services the record keeper or plan administrator will offer for having participants in plan or out of plan, or moving them out of plan, what the philosophy is of the plan sponsor, whether or not they want to keep retirees in the plan or if they don’t.  Those are some really key questions to ask at this point and to understand so that you can start to develop a sense for what types of solutions are out there, how are people thinking about them, how could they tie into the accumulation or default side of the plan.  And then how do they work with the record keepers going forward on the innovation to get to the point where we are starting to integrate more of these into Defined Contribution plans.

Laura Keller: And you talk about that trend moving, you know, from what we once saw to what we see now, is that just because a lot of people don’t have the same, maybe pensions are really gone away with at this point?  Of is that just a more, again, a process in and of itself?

Christine Stokes: I think the Pension Protection Act, the PPA that Jeff referenced before in 2006, they made enhancements in 2007, really set the trajectory for 401(k)s to take over.  And so what we’ve seen is we’re moving from a government employer model with Social Security and Defined Benefit being the primary vehicles for retirement savings, to more an employer employee driven model, where the employee really has the responsibility for saving themselves.  And they have the ownership of really investing, ultimately selecting their asset allocation.  And the employers provide them that opportunity.  So as you have these plans grow and these plan structures grow and as more and more DB plans are coming off of the books or being frozen from the employers, you are going to see this trajectory continue.  And this evolution is going to continue to happen where participants are going to be responsible for their income and their decumulation.  And there’s broad recognition that we implemented default solutions and we implemented auto-enrolment and auto-escalation because it’s not easy for the participants to save on their own and make those investment decisions.  So we can expect that the income component will be easy for them as well.

Laura Keller: Right, they need some help on that.  So you mentioned that, you know, responsibility for their own savings.  And, John, you are almost the steward of that responsibility because you are the manager who’s really looking at that.  Do you find that it’s harder in these kinds of environments, this market that we’re seen in the last week and a half, you know, where the Dow dropped, that incredible drop over 830 points in one day, things were shady and crazy and then they’re fine a few days later, is that a harder environment to actually manage in?

John Cunniff: It’s an opportunity really, we have an optimized allocation of our cash that comes in every day.  And we react to changes in the market and take advantage of that short term.  So where assets are not performing as well, we’ll be adding and then the sun will come out the next day.  And so you pick up a little bit of reversals that way.  So the large Target Retirement Date providers are set up to handle all of that.  And we managed our funds through 2008 and saw volatile markets and just the discipline during the bottom of the equity market, because for example, in the Target Retirement Date Funds for young individuals we would be buying back equities, even when equities had fallen.  And as an individual investor emotionally it’d be very difficult to say, “I’m going to stay with this plan.”  You’d be like, “I’m not so sure.”  But when you have a professionally run fund you have to by prospectus go back to that, and then the markets recovered and those funds have delivered tremendously for those individuals invested in them.

Laura Keller: But I think I’m almost asking you for your secret source as a portfolio manager because as you say, I mean I thought about, well, okay, the market’s falling, is it a time to buy in, is it not?  And I had many professional managers here saying, “It’s the time to buy.”

John Cunniff: Yeah, it’s the time to stay invested; the key is to have a long term focus, what is your goal?  Your goal is to save and then replace income in retirement through the Target Retirement Date Fund, so have a long term plan that way.  And then here in a single fund that’s provided professionally.

Jeff Eng: Yeah, I think that’s the big key is the Target Date Funds, again, it’s designed for a very long time horizon, you know, most of us hopefully are going to have a 40 year working career and then 40 plus years in retirement.  So it, you know, while there’s always going to be volatile markets going throughout the time horizon, that’s why it’s, you know, really important to have professional management of it.  But the diversification that’s there as well is taking advantage of that market volatility and participants, if they continue to contribute they’re getting the benefits of that dollar cost averaging.

So I think it’s important that investors and that advisors remind their plan sponsors, I think that’s the big value add, that advisors provide during these market volatility times is to kind of remind them, it’s like, yes, the markets are volatile but your participants are okay because they’re invested in the Target Date funds.  And again, that would go back to if they did that due diligence and did the review of their plan and found out that most of their participants aren’t, well, then that would be a good chance time to mention them, well, we maybe should be considering doing a re-enrollment so that we get more of your participants into the Target Date Funds, so that way they don’t get that angst when there is that market volatility.  Because the Target Date Funds they are strategically allocated, right, they’re going to stay the course, with the market volatility that we saw, it goes down, well, that’s an opportunity to buy, it’s not selling out of the items that had dropped.  And then when the market comes back up, just like it did yesterday, well then they’re reaping the benefits of it versus if I was a single investor on my own taking a look at it and that fear setting in of wait a minute, the market’s just dropped.  I need to protect whatever retirement assets I have because that is my primary source of retirement income, and then selling out and then all of a sudden now the markets go back up.  And if they wanted to go back in it’s too late.  And a lot of times they get frustrated and then going to be parking it in cash or a money market fund and that is not going to help them to grow their assets appropriately to help them to save for retirement.

John Cunniff: Yeah, I can also add just in the past decade the other product innovation that we’ve seen in the Target Date Industry is expansion diversification, and most providers have brought that forward.  For example, more areas of the equity market, such as international small cap equity, adding diversification there on top of US and developed markets and emerging.  And then within fixed income adding different credit investments like high yield emerging market debt, and then other diversification like international bonds, and then some providers such as ourselves, we’re bringing forward direct real estate, that’s very attractive risk adjusted returns over the long line.

Laura Keller: And not correlated to financial markets?

John Cunniff: Not correlated to financial markets, so a degree of independence there.  And then some others have brought forward commodities which have been very volatile, but at different times, like for example, month to date they have done well, however, year to date they’re down.  So they will perform differently than the overall market.  So when you’re looking at a different Target Date provider you want to see all of the features they’re bringing forward, not just the glide path, active/passive, but also the degree of diversification.  In addition, for the larger firms, they’ll generally have groups of managers actively that have different approaches to investing and that can be very powerful, they have a smoother ride for the shareholder and have a more resourced team overall that you’re bringing together in a Target Retirement Date Fund.

Laura Keller: Well, and as you say, it probably makes sense to diversify more as we put more of that responsibility on to the Target Date Manager, then you sort of need to have an ability to smooth out.  Because I think, to Jeff’s point, I mean it’s great when the markets do rise again but we know sometimes that does not happen.

Jeff Eng: Sometimes it takes a little bit longer than we expect or want.

Laura Keller: Yes.  Well, we’d all like performing markets to the upside, but sometimes that’s not happening.

Jeff Eng: So, maybe, John, if I can ask, you know, when you’re taking a look at the portfolios and especially looking at the other asset classes.  You know, how would you say it’s important or how would you look at allocating and determining what the appropriate allocation is to alternative asset classes or emerging markets?  Because, you know, if they do have those low correlations to it, do you want to put a large allocation, you want to put small, how do you optimize around that?

John Cunniff:  Well, we have an approach that focuses on the solution as a retirement outcome that our goal is to maximize the experience for the individual.  So we have a simulation process, take the average investor, a wide range of future markets that are realistic, good markets and bad.  And then have the individual save and look at the range of outcomes on the day to retirement and then the probability of having income in retirement through a systematic, realistic systematic withdrawal program, growing with inflation.  So it’s all about tradeoffs.  If you have equities in fixed income in your glide path and then you add a real asset like real estate, that has a degree of independence and add that thoughtfully across the glide path, you could improve the outcome experience.  You can have less unfortunate outcomes leading up to retirement and improve the probability of having income in retirement.  So it’s bringing a risk adjusted asset and improving your outcome from a risk adjusted perspective for the individual.

Laura Keller: It’s a lot of models to run through.

Christine Stokes: It’s worth noting, and I hear it less but it’s still worth noting that you don’t need to replicate the underlying asset classes that are in a Target Date structure in the menu for participants in the core menu.  So we have heard before that some plan fiduciaries would like their asset classes to be consistent within the Target Date Fund and then within the core menu, so that their participants also have exposure to that diversification if they choose to do it on their own.  However, in the case of direct real estate, for example, or commodities, you don’t necessarily want participants to have the ability to allocate or over-allocate to those asset classes, if they could even allocate at all on their own in the case of direct real estate.  So it’s worth noting that when you have a professionally managed product like Target Dates it doesn’t need to be replicated on the core menu.  And you do want the professionally managed asset class diversification that you would get to be separate from the sleeves that are provided on the core menu for participants.

Laura Keller: So if I can summarize that then Christine, then what you’re saying is you, as a plan sponsor may not want to give the ability to your participants to go into commodities, only from that side, just given the volatility.  But the Target Date Funds, depending how they’re set up, whether they have the commodities exposure or real estate exposure, it’s kind of hard to get as a retail investor.  That’s something that is going to be professionally managed, and that plan sponsor can count on as a more smoothed out kind of a retirement?

Christine Stokes: Absolutely.  Absolutely.

Laura Keller: Okay.  Well, and thinking about that, you know, because we’ve really again and again touched on this idea of, John, you brought up earlier, in the index side of things, the more passively focused and then the more actively focused.  So as you talk with those plan sponsors, Christine, what are they interested in or do they have any concerns on one side or the other?

Christine Stokes: I think given the regulations that have come out in 2012 and 2013 around fee disclosure.  I think the past 5 years were really spent on looking at the investment menus and ensuring that the solutions were appropriately priced for the plan participants and for the services through plan administrators that the plan sponsors were receiving.  I think now that we’re 5 years, about 5 years out from that and a lot of that has been reviewed, we’re starting to hear the conversation shift from purely just what is the price to what are the outcomes, what are the potential outcomes for the participants.  So you’re starting to have more of the dialog around, especially again in the rising interest rate environment that we’re in and with enhanced market volatility.  You’re starting to have more of the dialog around a holistic approach as opposed to a laser focus on fees that we’ve had just based on the disclosure regulations that came out.  So in that holistic approach you’re starting to talk about retirement income, you’re starting to talk about, you know, drawdown an income in retirement.  You’re starting to talk about diversification more and exposures to different asset classes, and how that’s going to balance out in the new market environment that we’re entering into.  So you are starting to see those conversations shift somewhat, which I think it’s a good thing, and it’s important.

Laura Keller:  And those, the disclosure regulations that you mentioned, could you just briefly sum them up for us so we understand how they impact the Target Date Funds?

Christine Stokes: So there were 404(a)(5) which were participant disclosure regulations and 408(b)(2) which were service, plan service provider regulation.  So it essentially said that you needed to ensure that all of the fees that were being charged to a plan and subsequently charged to a plan participant were fully transparent.  And it caused a lot of reflection on the services that were being provided to the plans and on the fees that were being charged.  So you had a few years of looking at what those fees were and what the services were and thinking about investment options and readjusting if necessary.

Laura Keller: Well, and thinking about trends and changing things, I wanted to ask Jeff, you touched on earlier about active management as well.  But I wanted to particularly ask you about multi managers, and maybe, John, you can feel free to jump in because this would be people you would have to deal with.  But I’ve heard that about it before, as Target Date Funds sort of mature, they become more popular, not just having a single manager but having multiple managers, presumably who have some expertise, specifically managing let’s say real estate, specifically managing the commodity.  And then I guess I think of it as a fund of funds, but someone over the top who oversees how that actually, all the allocations go.

Jeff Eng: I think that was a trend that came about a couple of years ago in terms of, you know, there’s open architecture, right, it was a great thing in terms of for record keepers and being able to open architecture whereby the plan sponsor working with their advisor and consultants can pick the best of breed investment managers across each asset class and put that into the particular menu.  And, you know, that works well.  Then it was a matter of, well, if it works well in the core menu, well, now let’s take a look at the Target Date Funds.  If the Target Date Funds, most of them primarily started out as single manager Target Date Funds, you know, can we work together to basically create a multimanager leveraging against, supposedly best of breed investment managers across the spectrum for each asset class to create that.  And I think unfortunately there has been some studies recently that have come out that says the … the story’s still out, the jury’s still out on that in terms of whether or not there really is the benefit.  And, you know, yes, you know, looking across the different asset classes you’re going to have different managers who are the best at a particular time period within each asset class.

But to John’s point from before, and I think that’s very important, as a Target Date Fund manager when you’re taking a look and you’re managing each of the underlying asset classes and, you know, trying to put all of those things together, it’s very important to have familiarization of how the underlying managers are managing that asset class.  Is there overlap?  Is there securities in your large cap that is also in your SMID cap or maybe new SMID cap in your small cap.  So those are the types of things that is very difficult for an asset manager of a multimanager because they might not have those insights in terms of how the underlying managers are being able to do that.  So, they have an idea, they’re putting it together but realistically their ability to understand that in their insights is a little bit limited.  The other thing about that is from a fee standpoint, a lot of the multi managers you have, an independent investment manager or a Target Date Fund manager at the top and then all of these other investment managers underneath.  Well, then that means you have an asset allocation fee with the underlying fees of the underlying managers.

Laura Keller: Which, by the way is one of the things that sort of put a hole in the fund of funds hedge fund world model, which was exactly that, by God.

Jeff Eng: Correct, because the whole thing was like, well, unfortunately, not unfortunately but everyone’s got to get paid so the asset allocation provider’s providing a service, the underlying manager is providing a service, well, those fees add up.  Then if you take a look at a single manager, well, a single Target Date Fund manager, they have the ability whereby the manager can see underneath.  Because they’re the same fund family, they understand what the market outlooks are, they can see if there’s any overlap by doing sort of like an x-ray analysis to kind of look under the hood and see if there’s overlap.  And if there is, it’s like, oh, then you know what, there’s going to be some additional correlations that’s in there that may not be just by looking at an asset class level.  So that just provides a single manager the ability to being able to do that.  And then from a fee standpoint, because it is a single manager and, you know, they can adjust the fees appropriately to be very competitive out in the marketplace because they’re providing both the asset allocation services as well as managing the underlying investments.

John Cunniff: And so we have expertise across equities, fixed income and real estate.  And then working one-on-one with teams is necessary, like for example, when we launched our real estate strategy we defined it, I defined it with my team, with the Target Date team, of having a custom design real estate strategy that will work exactly for the Target Date series.  So having that degree of internal partnership and expertise is a great advantage.  And then as well the jury’s still out, Morningstar did do a study of those firms that did open architecture and those that do proprietary and it was mixed.  And it was the extra fees with the open architecture that Jeff alluded to, so the jury’s still out there.  And then in the marketplace generally in terms of sales and market share, it’s still large proprietary Target Date providers that are the largest leaders, so.

Laura Keller: Well, and thinking off of that, you know, because as you mentioned it would be your decision to make this as you’ve got these different funds that you’re managing toward a retirement date of.  When you do that, I mean you mentioned the flexibility, how much are you able to rely upon the expertise within Nuveen TIAA?  You have, as you mentioned, the real estate portfolio, but did you get inputs from them or is it you’re able to really look at that specifically for the Target Date Fund?

John Cunniff: Well, the particular real estate fund that we designed, we worked with them to design a real estate fund appropriate for Target Retirement Date Funds.  So we asked them to be a little bit more conservative, have slightly less leverage all in the United States.  So some of these parameters that would work for working with Christine and advisors, Jeff and the product management area and product development, that all worked together from a firm perspective in this space.  So having that scale and that expertise and being able to work one-on-one with those teams, then as well as we’re working with that, we have a top down view of different assets.  Then we sit down with them monthly and hear the bottom up, what are they seeing in the property market.  So we blend the best of that top down and bottom up view in helping set our allocation from, period.  We have a strategic allocation but then there is some decision-making short term around that.

Laura Keller: Almost like you run your own fund of funds then specifically to that Target Date.

Christine Stokes: What’s interesting is you’re actually seeing the market take a step back and evaluate it as well.  So you’ll see that the flows into custom Target Date Funds and the multimanager funds have levelled off over the last year or so, absent the report to, I think, determine whether or not that is the best approach going forward.  And it makes sense, in the grand scheme of things Target Date Funds are still relatively new.  So having a second look and identifying what is the best approach makes sense.

Laura Keller: Well, so we’re coming to the end of the panel here, we have a lot of insight that we’ve gone through already.  But, you know, you mentioned, Christine, Target Date Funds are really, you know, evolving, really becoming more popular, they’ve not been around that long.  So as we think about that and going forward, what innovations, what, you know, flows would you have to see before you think that this market is fully evolved or maybe you think it is already?

Jeff Eng: I wouldn’t say from a flow standpoint it needs to be fully evolved.  I think it’s still changing because providers working with advisors and working with participants are always taking a look at the retirement outcome.  Because at the end of the day it’s really important in terms of are we doing what we’re setting out to do with the Target Date Funds, and that’s to improve the retirement outcomes for those participants.  You know, both helping to get them to retirement, saving appropriately and investing appropriately, they get them to retirement, so that way they can withdraw an appropriate amount to help them to live off of and maintain their lifestyle in retirement.  But there has to be a prudent amount so that it’s sustainable throughout retirement.  So I think it’s going to be important that, you know, it’s always going to be monitoring, the markets are always changing, the landscape’s always changing.  So, you know, providers working with advisors to educate them in terms of the changes they’re going to be making, and then that’s the critical role that advisors play is kind of staying abreast of the landscape, working with, you know, the different providers.  Understanding what the changes are, which ones are making changes that they think are going to benefit participants and then which ones are just not making any changes.  And then helping to educate their plan sponsors, because at the end of the day that’s the fiduciary responsibility that the plan sponsor has is to determine, you know, is this the right solution for their participants?  And they need that help because there’s just so much, so many changes that’s happening, there’s so many things that’s going on that the advisor can really assist them with.

Laura Keller: Anything to mark the panacea from your side, John?

John Cunniff: I would just add just as I have seen over the last decade, many of the questions we received a decade ago were about accumulation and now you’re seeing more questions about what are you doing about accumulation and also retirement income, so.  And then you’re seeing it in the assets as well and the take up that we have individuals at all ages now, participating and many of them now had started 10 years ago while they were working and are now in retirement.  So you’re seeing more focus there of the whole glide path over the lifetime accumulation and then how you’re handling the outcomes in retirement through the systematic withdrawal or other additional features such as managed payouts.

Laura Keller: Right, so being able to really attune to all those things, final word, Christine.

Christine Stokes: Sure.  So there are two things that I’d really want to see to make me happy.  One would be increased savings rates, so we talked a lot about accumulation, but having more participants and employees have access to a plan and upping the numbers in terms of the amounts that they’re contributing.  I think on average right now the contribution rate, the average contribution rate is 4.6%, and that’s really not enough.  So increasing the savings rates overall getting into the plan and then to echo my fellow panelists, the decumulation.  So figuring out what the options, and I say options because I don’t think there’s a silver bullet to this, what the appropriate options are for the plans to help the participants drawdown in retirement.  And leverage, still continue to leverage the professional management and the lower fees that they get from remaining within a plan.

Laura Keller:  Well, that’ll be a good panacea to reach; I appreciate all your time here this afternoon, thank you.  Thank you and thank you for watching the Asset TV Target Date Masterclass, from here in New York, I’m Laura Keller.