Defined Contribution (DC) Asset Managers and Recordkeeper Survey: COVID-19 Response
Results from Mercer’s recent surveys provide a view into how defined contribution plans and their participants fared since late February.
By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer
A month ago, my wife and I returned from visiting Asia to see my son. It is amazing what a difference a month makes, as today the isolation and social distancing we are experiencing across most of North America is much more severe than we ever experienced in Asia. And like many, we are getting used to the reality of working from home, and finding our house, with both kids back from university, more crowded than it usually is this time of the year.
By contrast, my work supporting Mercer’s US Defined Contribution and Financial Wellness areas has been tumultuous over the past four weeks. The reality of job losses and many Americans not being in a position to make a living has been staggering. In response to health and economic concerns over COVID-19, the global markets have seen significant declines in both equity and investment grade credit, and we have heard invocation of the word “Depression” in the media far too often.
We have heard invocation of the word “Depression” in the media far too often.
Fortunately, the CARES Act enacted on March 27 removed, at least for the short term, constraints on loans and distributions for defined contribution (DC) plan participants affected by the virus. Although the law immediately relieves financial pressure on participants, our priorities, in my view, need to be focused in the following three areas:
- Priority #1 is health — hoping we can stop the spread of COVID-19.
- Priority #2 is immediate financial concerns — Do furloughed or laid-off employees have money to buy food or pay rent? And when do they get a job again?
- Priority #3 is longer-term planning issues like retirement security — unless, of course, participants are near or at retirement, in which case the calculus changes.
How have DC investment products fared?
Although retirement may not be the top concern for most people right now, we wanted to look at how defined contribution plans and their participants have fared since late February. Here’s what we found:
Target date funds
We began by surveying target date fund (TDF) managers[1], who in 2019 represented over a quarter of total DC assets under management. Overall, the feedback from managers has been encouraging and, while returns were expectedly negative, we heard the funds themselves had no rebalancing and few liquidity issues, given positive inflows: TDF investors are staying the course. There was mention of near-retirement TDFs experiencing slightly stronger than normal outflows at the margin. Those funds that did make dynamic or tactical asset allocation calls appeared to move to more conservative positioning.
Stable value
The second asset class we looked at was stable value funds, which are relatively unique to the US defined contribution market. During the Global Financial Crisis (GFC) of 2008–09, stable value faced some challenges that led to some post-crisis restructuring. So how did stable value funds do this time around? During the recent market declines and volatility, returns of stable value investments have remained positive, with cash flows approximately 5% above normal levels. Managers told us that despite the tough market, the asset class was faring relatively well, and possibly more importantly, they were having no issues obtaining the insurance they use to provide participant guarantees.
Managed accounts
Managed account service providers advise on 401(k) assets by creating a personalized asset allocation taking into account an individual’s specific needs and risk tolerances. These providers then implement the strategy by selecting underlying funds and rebalancing them over time. We surveyed the four largest providers. Our key takeaway was that each of their responses to the downturn was somewhat different: their stated approaches and methodologies had not changed (with the exception of frequency of rebalancing), in two cases, the providers lowered equity allocations post the market correction in late February, and in one case the provider increased equity allocation. Depending on how equities perform going forward, we will see which decision proves to be more successful.
Managed account providers reported generally increased interest from participants in terms of engaging their services and advice, but we think it’s too early to draw many conclusions. From a business-continuity perspective, managers told us that moving to remote call centers had taken place without material disruptions despite sharply increased call volumes. The managed account providers did report that participants nearing retirement were expressing some interest in adopting more conservative risk postures.
Recordkeepers: No big movements in participant accounts
A very positive report from recordkeepers was that, although the number of participant account transactions had increased materially, the actual volume of assets being traded remained small; that is, DC participants were not making big allocation or contribution changes. As expected, there was some movement to reduce riskier exposures for participants nearing retirement age. Call-center volumes increased markedly, with some expected lengthening of wait times. At the time of our survey, demand for loans or distributions had not increased, but with the passing of the CARES Act, this may change. Recordkeepers did report that they had been fielding queries from plan sponsors about potentially deferring or suspending company matching contributions (as some plan sponsors did during the GFC).
During the end of the first quarter, the sharp market drop could have panicked many participants. Thankfully, most now appear to be prepared to stay the course. Of course, much uncertainty lies ahead. COVID-19 remains with us and we will all need to be vigilant. That means staying healthy, monitoring the numbers of new cases of infection, and taking care of the significant and growing number of the unemployed and underemployed across the country. Given what we know about the general savings landscape in the US, the latter group may need to take loans and distributions from their plans. Let’s hope the market gives all of us more joy than it did in the first quarter.
In the meantime, #stayathome, #staysafe.
Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Click here for the Important Notices.
[1] Mercer survey responses were received in the second half of March and hence may not represent all that happened in Q1.
