Point of View - Global Investment Solutions from Northern Trust

Voices: Andrew Smith

A review of current activity in global financial markets, with an emphasis on U.S. markets.

Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.

The DB-ization of Defined Contribution Plans
The rapid growth of defined contribution (DC) plan assets in recent years reflects the increasing role these plans are playing in providing retirement income for the global workforce. According to an early 2008 Watson Wyatt survey, DC plan assets now represent almost half (43%) of all retirement assets worldwide. In the United States, DC assets total about $3 trillion, an increase of $1 trillion during the past six years. This rapid growth has captured the attention of both plan sponsors and government officials. This increased scrutiny has resulted in an evolution in the management of DC plans, with strategies and solutions originally developed for defined benefit (DB) plans migrating into the DC universe.

Mandating Participation

According to a Hewitt Associates survey, employers are taking the initiative in getting employees to participate in their DC plans: 44% offered automatic enrollment; 44% use automatic contribution escalation, increasing the employee contribution rate 1% annually up to a maximum 10% unless the employee opts out; and 51% provide automatic rebalancing at set intervals. Among employers that didn’t already offer these features, a significant number expected to do so in 2008.

Employers Expecting to Add Features to DC Plans in 2008

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Source: Hewitt Associates’ “Hot Topics in Retirement 2008”

The Growing Use of Target Date Solutions

A Deloitte survey found a jump in the prevalence of target date investment solutions in DC plans. Many consultants believe these offerings could comprise from 65% to 75% of DC plan assets by 2015.

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Source: Deloitte Consulting LLP’s 2008 “401(k) Benchmarking Survey”

Shifting Mix of Investment Vehicles

Although mutual funds are currently the most popular investment vehicle, DC plan sponsors increasingly are using collective trusts for greater transparency, lower costs and solutions geared toward ERISA investors.

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Source: Deloitte Consulting LLP’s 2008 “401(k) Benchmarking Survey”

Evaluating Glidepaths and Probability of Outcomes
“Plan sponsors and their investment consultants increasingly use a two-prong approach to measure the quality of target date fund performance and design. On a micro level, sponsors should be comfortable with the underlying investments that make up the target date funds. Particularly in the case of actively managed funds, plan sponsors should essentially be comfortable recommending each underlying fund on its own merits. On a macro level, plan sponsors should have confidence that the target date manager has a robust and tested glidepath that incorporates multiple savings and spenddown scenarios.Target date managers use a wide range of assumptions, from life expectancy to average income, so sponsors should have the confidence that those assumptions are comprehensive enough to cover an array of participant demographics, both pre- and post-retirement.”

—Jim Danaher, senior product manager-defined contribution solutions at Northern Trust

Related Links

“Trends in the DC Plan Universe”
Read the article from the January 2008 issue of Point of View on the surge in use of auto enrollment and target date solutions among defined contribution plan sponsors.

“Inside Target Date Funds”
Read the article from the July 2007 issue of Point of View on selecting a target date solution that fits participants’ needs.

“The Evolving Plan Structure Landscape”
Read the article from the July 2007 Point of View on how plan sponsors worldwide are combining the best features of defined benefit and defined contribution retirement plans to address new regulations and market trends.

“Target Date Funds”
Download Susan Czochara’s May 2007 podcast on why the Pension Protection Act of 2006 has led many defined contribution plan sponsors to adopt target date strategies as their new default investment option. (7 min. 13 sec/5.1 MB)

“Making Investment Choices as Simple as Possible: An Analysis of Target Date Retirement Funds”
Read an abstract of a January 2007 research paper written by Boston University’s Zvi Bodie and Jonathan Treussard and download the full paper.

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This material is directed to eligible counterparties and professional clients only and should not be relied upon by retail investors. For Asia Pacific markets, it is directed to accredited investors, institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy or product described herein. This information is not intended as investment advice and does not take into account an investor’s individual circumstances. Opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed.

Northern Trust Global Investments (NTGI) comprises Northern Trust Investments, N.A., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., the investment advisor division of The Northern Trust Company and Northern Trust Global Advisors, Inc., and its subsidiaries. Northern Trust Global Investments Japan, K.K. is regulated by the Japan Financial Services Agency. Northern Trust operates in Australia as a foreign authorized deposit-taking institution (foreign ADI) and is regulated by the Australian Prudential Regulation Authority. Northern Trust operates in China as a Representative Office and is regulated by the China Banking Regulatory Commission. Northern Trust in Hong Kong is a securities company regulated by the Securities and Futures Commission. Northern Trust in Singapore is a foreign wholesale bank regulated by the Monetary Authority of Singapore.