The Finance Of Longevity

Do Alternative Assets Improve the Performance of Target Date Funds?

The urgent case for diversifying TDFs in retirement plans and why now is the moment to do so

The Evolution of Target Date Funds: Using Alternatives to Improve Retirement Plan Outcomes

NEW YORK, Oct. 19, 2018 /PRNewswire/ –Defined Contribution plans will play a significant role in determining the retirement well-being of many American workers: their net investment performance and diversification rather than only low fees should be of paramount concern, particularly as we mark the 10-year anniversary of the public market recovery from the Global Financial Crisis.

This is how Angela Antonelli, Executive Director of the Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy, framed the discussion at an exclusive roundtable of industry participants on the topic: “Act now: The urgent case for diversifying TDFs in retirement plans and why now is the moment to do so”.

Hosted by Pantheon, an established private markets investor and high-profile advocate of incorporating private market assets within DC plans, Ms. Antonelli chaired a discussion with Washington State Investment Board, AllianceBernstein and Willis Towers Watson. The event followed the Center’s recent publication of “The Evolution of Target Date Funds: Using Alternatives to Improve Retirement Plan Outcomes,” produced in partnership with Willis Towers Watson.

Theresa Whitmarsh, Executive Director of the Washington State Investment Board, noted that WSIB had been dedicated to significant private market investments for 30+ years. “When it comes to including private market investments in the target-date glide paths of DC retirement funds, the investment case appears clear and advantageous for us – but the nitty-gritty challenges of fund operations, fund construction and participant education are not trivial. At WSIB, we’re working through these challenges one at a time. We are optimistic, but not rushing.”

David O’Meara, Head of DC strategy at Willis Towers Watson, who was a contributing author of the Georgetown report, shared data from Willis Towers Watson’s DC Plan Sponsor Survey that 81% of plan sponsors now only offer a DC plan to their new employees and that Target Date Funds dominated Qualified Default Investment Alternatives – to where the majority of all new DC plan contributions flow. The focus of the discussion was, therefore, on how to encourage policymakers, plan sponsors, service providers, asset managers and other DC market participants to take advantage of all available tools at their disposal to help improve DC participant outcomes with a focus on TDFs – the professionally managed component of DC plans – in particular.

Experted Retirement Income

Highlighting certain findings from the Georgetown report, Mr. O’Meara explained how expected annual retirement income increases from $53,000 to $62,200 when a diversified selection of alternative investments is incorporated into a TDF: “The expected retirement income can be increased dramatically while also mitigating downside risks. At age 65, an individual could expect investment returns to increase from 5.1% to 6.1%. The challenges to creating better investment solutions in DC plans can be effectively managed to allow plan sponsors to take steps toward enhancing retirement outcomes for their participants,” he commented.

Ms. Antonelli asked panellists: “Why don’t we see greater diversification of asset classes in TDFs today? It is accepted in the Defined Benefit world but not in DC plans. What are the challenges to be overcome and can they be easily addressed?” Noting the high valuation of public markets and their recent volatility, Ms. Antonelli also invited panellists to comment on: “If what goes up must come down, should there be a sense of urgency to enabling greater diversification?” In response, Christopher Nikolich, Head of Glide Path Strategies (US), Multi-Asset Solutions, at Alliance Bernstein asked: “Do fiduciaries believe that the robust stock and bond returns that we have experienced since 2009 will continue indefinitely? If not, they had better consider additional forms of diversification within their target date fund.”

the nitty-gritty challenges of fund operations, fund construction and participant education are not trivial. At WSIB, we're working through these challenges one at a time. We are optimistic, but not rushing...

Fear of litigation and a strong trend towards lowering investment management fees by allocating capital to passive and index strategies present significant hurdles to achieving TDF diversification. “Sponsors look to regulators and policymakers for direct guidance, which is often followed by adoption,” noted Mr. O’Meara. “Support is needed to encourage the investment design evolution that can materially improve retirement outcomes.”

His comments were echoed in Ms. Antonelli’s concluding remarks: “Policymakers should consider these findings about the inclusion of alternate asset classes in DC plans, specifically through professionally managed target date structures. Even absent any additional action by policymakers, plan sponsors with an interest in implementing portfolios with alternate asset classes can work with their advisors, custodians and recordkeepers to implement solutions that enhance participant outcomes for a more secure retirement.”





About Pantheon
Pantheon Group* (“Pantheon”) is a leading global private equity, infrastructure and real assets fund investor that invests on behalf of over 510 investors, including public and private pension plans, insurance companies, endowments and foundations. Founded in 1982, Pantheon has developed an established reputation in primary, co-investment and secondary private asset solutions across all stages and geographies. Our investment solutions include customized separate account programs, regional primary fund programs, secondaries, co-investment, infrastructure and real assets programs. Pantheon has four decades’ experience of investing in private markets, and has offered Private Equity solutions for the U.S. defined contribution and private wealth markets since 2014.
As at March 31st, 2018 Pantheon had $40.4 billion assets under management** and we currently have around 250 employees located across our offices in London, San Francisco, New York, Hong Kong, Seoul***, Bogotá*** and Tokyo***. Our employees include 80 investment professionals.
Pantheon is majority-owned by Affiliated Managers Group Inc. (“AMG”), alongside senior members of the Pantheon team. AMG is a NYSE-listed global asset management company with equity investments in leading boutique investment management firms. The ownership structure, with Pantheon management owning a meaningful share of the equity in the business, provides a framework for long-term succession and enables Pantheon management to continue to direct the firm’s day-to-day operations.
* Pantheon Group refers to the subsidiaries and subsidiary undertakings of Pantheon Ventures Inc. and AMG Plymouth UK Holdings Limited and includes operating entities principally based in the US (San Francisco and New York), UK (London), Hong Kong and Guernsey. Pantheon Ventures Inc. and Pantheon Ventures (US) LP are registered as investment advisors with the U.S. Securities and Exchange Commission (“SEC”); Pantheon Securities, LLC. is a broker dealer registered with the SEC and is a member of the Financial Industry Regulatory Authority (“FINRA”). Pantheon Ventures (UK) LLP is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom. Pantheon Ventures (HK) LLP is regulated by the Securities and Futures Commission in Hong Kong. Pantheon Ventures (Guernsey) Ltd and a number of other Pantheon entities incorporated in Guernsey are regulated by the Guernsey Financial Services Commission.
** This figure includes assets subject to discretionary or non-discretionary management, advice or those limited to a reporting function.
*** Please note that the Bogotá office is a representative office of Pantheon Ventures (US) LP (“PV US”), a Korean subsidiary of PV US has opened the office in Seoul, while our Tokyo office does not conduct regulated activities.
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