Employers encouraged to take fresh look at equities
Anne F. Ackerley is a managing director of BlackRock, the world’s largest asset manager with $4.6 trillion in assets under management. She leads leads the company’s U.S. and Canada Defined Contribution Group. Ackerley has held other executive positions with the company, and has served on the Board of Governors of the Investment Company Institute. She holds an MBA from the Harvard Business School. She recently shared her insights on retirement issues with EBN.
EBN: You have suggested that plan sponsors take a fresh look at how they deploy equities in their investment options. How so?
Ackerley: There has been a big move to index in 401(k)s over the last 10 years. If you look at what’s happened in the market since 2008, returns have generally been double-digit. Some of that’s been due to expansive monetary policy, but that ‘quantitative easing’ has ended. We think it’s going to be much harder to get those kinds of returns going forward. If you look at the market last year, it was only up about 1%, and then you look at what’s happened over the first two months of this year, there’s been a lot more volatility. And so with that as the backdrop, we think that plan sponsors should be thinking about where they are going to find alpha.
EBN: So you’re talking about moving away from indexing?
Ackerley: In volatile markets, active managers tend to be able to take advantage of the differentiation in performance more than markets that are characterized by what I’ll call easy returns. We’re trying to focus in on different sources of returns, and different sources of risk. And one of the areas that we think is really interesting for a defined contribution plan is focusing on some data-driven strategy. So whether it’s a smart beta, factor investing, maybe it’s scientific active, these strategies can be added to passive index strategies and diversified sources of risk and return.
EBN: So it’s not simply a matter of finding exotic new asset classes?
Ackerley: For us, it’s really less about which sectors and more about the approach to portfolio construction. So, how do you take different sources of alpha, different sources of risk, and combine them together in a portfolio, and that’s what we’re looking to do. We’re looking at ways of getting differentiated alpha, and doing it in a risk-controlled way.
EBN: How do you lead plan sponsors to adopt that approach?
Ackerley: It starts with their beliefs and their goals. So we’ll have a discussion with them about how much risk are they willing to take, what exposures are they willing to entertain, their fee budget, and their risk budget. And then we’ll work with them. An example might be looking at multi-strategy equity portfolio.
"People generally accept the higher default rates. Even with re-enrollment there is very little feedback from participants."
So let’s say a plan sponsor wants their core menu option to have exposure to international equity. What we’ll do is if they just got passive, we’ll work with them incorporating some active where we can probably get more return with the same amount of risk by combining active and passive. You could also do it for a U.S. equity fund.
EBN: Is it common for sponsors to have a fee budget?
Ackerley: When we talk to plan sponsors, they need to think about those tradeoffs between returns, fees, and risk. The real question is how do you help participants get the outcomes they want or need, and that involves looking at all the levers you can pull, the expected return, fees and risk. Alternatives to indexing are not necessarily a lot more expensive. Data-driven strategies often are not that much more expensive than indexing.
EBN: Can you tell me more about data-driven strategies?
Ackerley: Even in our fundamental active equity investing, we’ve incorporated much more use of data and technology. Everybody cites that statistic that most of the world’s data was created over the last two years, but even for stock pickers, particularly here at BlackRock, they’re using data, using technology and incorporating some of the things that have historically been done in, let’s say, scientific active or factor investing.
EBN: Are these strategies finding their way into funds that sponsors use for their target-date offerings?
Ackerley: On the target-date side we offer an all-passive solution, a hybrid solution, and an all-active solution. So depending on the goals and considerations plan sponsors have, you can incorporate this hybrid approach into a target-date. But we find sponsors branching out from the traditional approaches more in the core investment options. In the core options, some of the bigger plan sponsors have gone to what’s called a white label fund, where they can use a multi-strategy approach or a multi-manager approach.
EBN: What approaches are you taking to help plan participants mitigate interest-rate risk in fixed-income core funds?
Ackerley: Let’s say today a plan sponsor has a core fixed income option that’s all passive, benchmarked against the Barclays [aggregate]. So if you think rates are going to go up, you’d probably be concerned that your participants are going to be exposed to interest rate risk, rates going up, returns going down. So one of the things we recommend is incorporating credit risk, which is negatively correlated to interest rate risk. You can do that by adding a smart beta fixed income product that focuses on credit risk. You could add it to a passive piece, and that way you get much more balanced credit and interest rate risk but still in a core option.
EBN: Returning to TDFs, where does the slope of the glide path fit into the risk mitigation equation?
Ackerley: At BlackRock, we’re looking to give participants a smoother ride and we try to protect on the downside with our glide path. When markets get very volatile, participants tend to sell out of their target-date, and then they often miss the rebound. And so if we can give a smoother ride, investors will stay invested. And if you look at our product, in periods of market volatility and in periods of down markets, we’ll see smaller losses than our peers. And we can also look at flows and we will see less outflows than our peers. So for us, it’s a lot about giving participants that smoother ride.
EBN: What do you think of routinely auto-re-enrolling participants into a QDIA, forcing them to be more thoughtful about choosing an alternative set of investments?
Ackerley: We’ve had a few clients do it, but we certainly feel not enough. A plan sponsor often does it when there is some sort of catalyst there, they’re changing a recordkeeper, maybe they’re involved in a merger and they’re merging plans, they might be streamlining their investment menu and they’ll put people in the QDIA.
"There’s lots of talk around income solutions, but there hasn’t been as much action by plan sponsors in adopting them."
We believe sponsors should help their participants reallocate. Our surveys show that only about 30% of participants are confident they are in the right investments. When you look at total 401(k) investments, only about 20% are in target-date funds. Too many younger participants have 100% in money market funds, and too many older ones are 100% in equities.
EBN: What are you seeing with regard to auto-enrollment initial default deferral rates?
Ackerley: We see a lot of plan sponsors changing the initial default from 3% to 6%. In our own 401(k) at BlackRock, we just increased the default to 8%. On the auto-escalate, we typically see it in increments of one, but what we have seen is plan sponsors increasing the cap. A lot of plan sponsors that had it capped at 10% are moving that out to 15%.
EBN: Are you aware of the level of participant resistance to being pushed that way?
Ackerley: What we hear within our own plan as well as from plan sponsors is that people generally accept the higher default rates. Even with re-enrollment there is very little feedback from participants.
EBN: What mechanisms are you offering plans to help participants in retirement to avoid depleting their savings prematurely?
Ackerley: In the market overall, there’s lots of talk around income solutions, but there hasn’t been as much action by plan sponsors in adopting them. At BlackRock we’ve been talking about income for several years. We have a target-date that has an embedded annuity in it, but there are mechanical issues with that with the recordkeepers that haven’t been worked out, which is the main reason why that hasn’t been adopted. But we’ve got a number of different income solutions, whether it’s an annuity embedded in a target-date or a synthetic annuity.
EBN: There is an evolving paradigm shift from looking at participation rates, fees and the breadth of investment options, to retirement readiness levels. How are you helping sponsors get a handle on that?
Ackerley: We’ve created a tool called Future in Focus. It allows plan sponsors to play with what we call ‘the levers.’ We let them think about if you increase the default savings, if you put people into the target-date, if you auto-escalate, if you get people saving earlier, it quantifies the impact of each of these levers. And so we’ll work with the plan sponsor and show if you take this action, here’s what this does to the ultimate outcome. Or if you take this combination of actions, here’s what it does. Instead of us telling sponsors, ‘Here’s the way to do it,’ we can help them to come up with a path they think is right for their company to get to the outcome they need.