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Retirement Perspectives

Look for plans to add more options to de-risk via different asset classes.

There’s been a lot written about the new Department of Labor (DOL) fiduciary rule and the potential impact that it could have on broker/dealers, asset managers, and record keepers. But I don’t think there’s been enough emphasis on how it could affect 401(k) plan participants and investment menus in general.

The DOL has made it clear that it’s really trying to keep money inside of 401(k) plans for various reasons, including the institutional pricing and inherently different fiduciary governance. But as fiduciary rule policies start to take hold, we believe they will create an environment whereby plan participants are going to use their 401(k) plan for matters such as capital preservation and even retirement-income distribution, whereas in the past, such plans were more of an accumulation vehicle.

Participants in a retirement plan would accumulate in a defined contribution plan, preserve in an IRA, and de-cumulate in an income product or an annuity. Now, plan menus must evolve in order to accommodate this changing dynamic. Consider the historical dearth of fixed-income plans on 401(k) menus depicted in Chart 1 and you can see what we mean.         

 

Chart 1. Traditional 401(k) Asset Options May Not Serve De-Riskers
Average number of traditional asset-class options in defined contribution plans in 2013 (latest available data)


Source : BrightScope and ICI; latest available data as of December 31, 2013. Figures for equity and fixed-income represent average number of investment options in each category in U.S. 401(k) plans as determined by BrightScope and ICI.
The historical data are for illustrative purposes only, and do not represent any specific portfolio managed by Lord Abbett or any specific investment.

 

The more one ponders the likely evolution of 401(k) plan demographics, the more one can envision a greater appetite to de-risk as participants get closer to, and even through, retirement. (See Chart 2.) For this reason, you might want to look at different asset classes, such as high yield or global fixed income, or ways that a participant can slowly de-risk away from the equity markets, where traditionally you wouldn’t find those types of asset classes as standalones inside of a 401(k) plan. There may be an appetite in future for those types of products.

As custom, or semi-custom, target-date funds emerge in plans, we also would anticipate the more peripheral asset classes mentioned above to gain market share. Asset allocators have long seen these as important diversification tools inside of models.

 

Chart 2: How 401(k) Plan Lineups Might Evolve


Source: Lord Abbett. The chart depicts in general terms how U.S. 401(k) plan lineups might change over time to reflect a greater average number of fixed-income investment options. The historical data are for illustrative purposes only, and do not represent any specific portfolio managed by Lord Abbett or any specific investment.

 

The Bottom Line
The DOL rule could cause 401(k) participants to stick around much longer than they originally expected because of the perceived preference by the DOL toward keeping assets in the plans and away from rollover IRAs. Because of this, plan sponsors must take into account this new reality. And this in turn could create situations wherein they need to incorporate different types of products to address key risks participants now face in retirement.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results.

A 401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit sharing feature to the plan. Earnings accrue on a tax-deferred basis.

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