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Defined Contribution Trends
Presentation to the Stable Value Investment AssociationOctober 11, 2016
For institutional investor use only
1
DC approaching 50% of global pension assets…
program structures differ by country
As of 31 December 2015
Source: Allianz International Pensions Country Factsheets, 2016
Mandatory DC
Mandatory DB/hybrid
Auto enrollment DC
Voluntary DC/DB
2
U.S. defined contribution investment structures continue
to evolve
SOURCE: PIMCO
Refer to Appendix for additional outlook and risk information.
INVESTMENT TIER CURRENT FUTURE
Investment defaults
Packaged target dates
Limited diversifying assets……………………………
Open architecture
Increased diversifying assets, including alternatives
Core line-ups Equity risk dominate
Few real asset and global offerings
Increased balance in offerings
More real assets, diversifying bonds and global offerings
Retirement income
Low retiree asset retention
Few retiree-appropriate investments/services……………………………..
Increased retiree asset retention
More risk-appropriate investment solutions
3
PIMCO’s 10th Annual Defined Contribution Consulting Support
and Trends Survey
66 DC consultants and
advisors from 23 states
PIMCO’s DC Practice has prepared the 10th annual Defined Contribution Consulting Support and Trends
Survey to help plan sponsors understand the breadth of views and consulting services available within the
DC marketplace. Our 2016 survey captures data, trends and opinions from 66 consulting firms across the
U.S., which serve over 11,000 clients with aggregate DC assets in excess of $4.2 trillion.
1
2–3
4–5
15
# of
consultants
SURVEY PARTICIPANTS
As of 1 January 2016
11K+ DC plan sponsor
clients represented
$4.2T+ In client
DC assets
4
Defined contribution business…meeting retirement goals and managing litigation risk drive decision making
Q: As plan sponsors consider their DC plan, which of the following factors drive decisions the most? (n=65)
8%
8%
9%
18%
20%
34%
8%
8%
8%
11%
23%
22%
17%
5%
5%
5%
11%
11%
18%
25%
8%
18%
5%
6%
23%
9%
20%
6%
9%
22%
13%
14%
17%
13%
6%
8%
20%
9%
Keep pace with competition
Meet workforce management objectives
Keeping administration simple/easy as possible
Manage organizational costs
Performance of an investment
Cost of an investment
Manage litigation risk
Meet participant retirement goals
RANK ORDER OF PLAN SPONSOR DECISION MAKING
#2 #3 #4#1 #5
2%
2%
5DC_standard_tab_03
DC Investment
Design Future
1. Investment defaults
2. Core investment line ups
3. Retirement income
6
Pension Protection Act (PPA) 2006 support of automatic improves DC
plan participation
DC plans using auto-enrollment realized an average participation rate of 86% versus 63% for those without auto
enrollment – a 37% increase!
Source: Aon Hewtt’s 2016 Universe Benchmarks - Employee Savings and Investing Behavior in Defined Contribution Plans
86%
63%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2009 2010 2011 2012 2013 2014 2015
Participation Rates
Auto Enrollment No Auto Enrollment
7
Auto enrollment feeds increased assets into the DC plan default
and draws assets away from stable value and other core options…
As of 31 May 2016
SOURCE: Hewitt 401(k) Index
Over 25% of existing DC assets now allocated
to target date fund strategies; forecast is for
50% of assets to be in target date strategies in
less than ten years.
Over 40% of new contributions are allocated
to target date strategies
New contributions flowing to target dates
Target date fund AUM growing
0%
10%
20%
30%
40%
50%
Jan
'05
Jan
'06
Jan
'07
Jan
'08
Jan
'09
Jan
'10
Jan
'11
Jan
'12
Jan
'13
Jan
'14
Jan
'15
Jan
'16
Bond
Co. Stock
Target Date/Risk
Equities
GIC/SV
0%
10%
20%
30%
40%
50%
Jan
'05
Jan
'06
Jan
'07
Jan
'08
Jan
'09
Jan
'10
Jan
'11
Jan
'12
Jan
'13
Jan
'14
Jan
'15
Jan
'16
Bond
Co. Stock
Target Date/Risk
Equities
GIC/SV
8
Type of target-date strategy varies from full custom to single
manager packaged…consultants suggest approach by plan size
Target-Date Fund Structure LIKELY TO BE CHOSEN
89%of consultants recommend
target-date funds be
used as the qualified
default investment
alternative (QDIA)
n = 64
#1 Ranked Target-Date
Objective: Maximizing
asset returns while
minimizing volatility
relative to the
retirement liability
9DC_standard_tab_03
DC Investment
Design Future
1. Investment defaults
2. Core investment line ups
3. Retirement income
10
6
2
1 1
0 0
CAPITAL
PRESERVATION
FIXED
INCOMEEQUITY
INFLATION-
PROTECTIONALTERNATIVES BALANCED
98% 100% 100% 84% 27% 44%
Active only 80% 37% 2% 37% 44%
Passive only 2% 0% 2% 10% 0%
Active/passive blend 19% 25% 41% 42% 5%
Multiple active & passive 0% 19% 34% 3% 2%
Mirrored active & passive 0% 17% 20% 0% 2%
Core investments: consultants suggest 10 investment strategies
across four primary risk pillars…primarily actively managed
Optimal #
of options
% recommending
at least one
Most
recommended
strategies
(in order)
Q: What is the optimal number of core menu options for each of these asset categories? (n=62)
11
While nearly all consultants recommend stable value for the core, only half do so for blended strategies
Q: Which capital preservation strategies do you recommend? (n=66; n=36)
CAPITAL PRESERVATION RECOMMENDATIONS
Capital
preservation
Fixed
income Equity
Inflation-
protection
# of stand-alone options 1 2 6 1
Capital preservation strategies Stand-alone* Blended**
Stable value 97% 50%
Money market 68% 42%
Low duration 33% 64%
Ultra-short bond 26% 50%
*Used as a stand-alone option on the core investment menu
**Used in a multi-manager/white label core option or in a sleeve in a custom target-date/risk portfolio
12
3%
7%
44%
65%
9%
13%
10%
18%
20%
16%
13%
18%
22%
25%
22%
15%
78%
68%
65%
51%
14%
5%
15% 11% 26%
Consultants recommend switch to stable value
Given the 2014 SEC money market reforms,
almost two-thirds of consultants (63%) are
likely or very likely to recommend a capital
preservation alternative for clients invested in
a non-government money market fund.
For plan sponsors seeking alternatives to
MMFs, over three-quarters of consultants
(81%) are likely or very likely to recommend a
switch to stable value.
Q: If a plan sponsor is seeking alternatives to its MMF, how likely
are you to recommend a switch to the following? (n=62)
*To be fully implemented in October 2016
Q: Given the SEC money market reforms,* how likely are you to recommend a capital preservation
alternative for clients invested in a non-government money market fund (MMF)? (n=62)
Stable value
Government money market
An “ultra-short” fixed income option or one tailored for DC
A short-term fixed income option
A low-duration fixed income option
No change – keep the prime money market option
48%
Very
likely LikelySomewhat
likelyNot
likely
CORE INVESTMENTS
13
Many stable valuation evaluation factors rated very important
Q: How important are the following factors when evaluating stable value funds/managers? (n=63)
Other: Wrap capacity access
5%
8%
10%
32%
35%
60%
60%
61%
62%
63%
63%
23%
23%
61%
34%
50%
40%
40%
35%
37%
29%
32%
25%
57%
29%
29%
15%
3%
2%
8%
5%
47%
12%
5%
Fees
Diversified wrap providers
Depth of investment resources
Clearly understands book value risk
Fixed income management expertise
Wrap provider credit quality
Current crediting rate
Diversified fixed income sub-advisors
Past performance
Less constrained guidelines
Boutique stable value provider
Very
important ImportantSomewhat
important
Not
important
14
Plan sponsors likely to add more diversifying assets to balance
investment menu skew toward equity risk
Capital preservation
Global fixed income
Diversifying
fixed income
Inflation hedging
Global balanced
“1/n”
Capital preservation
Global fixed income
Diversifying
fixed income
Inflation hedging
Global balanced
DIVERSIFYING RISK EQUITY RISK
U.S. small
cap blend
U.S. mid
cap blend
U.S. large
cap blend
Developed
non-U.S.
Emerging Markets
U.S. small
cap blend
Developed
non-U.S.
Emerging Markets
15
Active management important in most asset classes
Non-U.S. bonds
U.S. equity (large cap)
TIPS
U.S. equity (small cap)
REITS
Commodities
U.S. bonds
Emerging market equity
Global asset-allocation strategy
Non-U.S. equity (developed markets)
As of 31 December 2015
SOURCE: 2016 PIMCO DefinedContribution Consulting Support and Trends Survey (n=63)
More than 90% of consultants believe that active management is important for non-U.S. bonds,
emerging market equity strategies and U.S. bonds.
Very
important ImportantSomewhat
important
Not
important
8%
10%
21%
26%
26%
29%
33%
40%
57%
67%
74%
13%
24%
35%
31%
44%
51%
28%
48%
35%
29%
24%
42%
37%
34%
36%
23%
17%
31%
11%
8%
5%
2%
37%
30%
10%
7%
7%
3%
8%
2%
0% 25% 50% 75% 100%
U.S. equity (large cap)
TIPS
REITs
Balanced strategies
Commodities
U.S. equity (small cap)
Target-date strategies
Non-U.S. equity
U.S. bonds
Emerging market equity
Non-U.S. bonds
16DC_standard_tab_03
DC Investment
Design Future
1. Investment defaults
2. Core investment line ups
3. Retirement income
17
Q: Approximately what percent of
your plan sponsor clients take the
below view on retaining retired
participants’ assets in their plan?
(n=52)
VIEW ON RETIREES
38%33%
32%
30%
14%
21%
17% 16%
0%
25%
50%
75%
100%
Perc
en
t o
f cli
en
ts
2015 2016
Actively seek to
retain these
assets
Prefer retaining
these assets, but
do not actively
encourage
Indifferent
Prefer retirees
move assets out
51%46%
Retirement income…interest in asset retention increasing
Sources: PIMCO DC Consulting and Trends Survey 2015 and 2016
18
Retiree assets also building in target-date strategies
SOURCE: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project: 1998-2014
DC ASSET ALLOCATION FOR 60+ YEAR OLD PARTICIPANTS
Stable Value
Target Dates +
Balanced
Target Dates
Balanced
Perc
en
t
Equity/Other
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
19
Q: What is your firm’s position on the use of the following investment and insurance retirement
income strategies? (n=57)
5%
5%
9%
11%
11%
12%
13%
14%
19%
29%
30%
39%
49%
51%
36%
42%
49%
52%
66%
46%
36%
53%
41%
30%
26%
41%
33%
33%
29%
14%
24%
21%
9%
14%
16%
14%
13%
14%
5%
7%
5%
11%
14%
9%
Managed payout funds
In-plan immediate annuity
In-plan deferred income annuity
Equity income
Asset allocation with lifetime income guarantee
Income-focused funds
Out-of-plan annuity
Managed accounts
Multi-sector fixed income
Cash management
At-retirement target date
SUPPORT FOR RETIREMENT INCOME STRATEGIES
DiscourageNeutralSupport client interestActively promote
Retirement income…capital market solutions preferred
Source: PIMCO DC Consulting and Trends Survey 2016
20
Retirement income…many concerns with in-plan insurance solutions
Q: What are the primary concerns that may stop your clients from offering
in-plan insurance products (e.g., annuities)? (n=63)
Portability 67% Operational complexity 35%
Cost 63% Communication complexity 27%
Insufficient government support (e.g., safe harbor) 62% Monitoring/benchmarking 25%
Perception of added liability 40% Low interest rate environment 16%
Insurance company default risk 37% Transparency 14%
Lack of liquidity and control 37% Selection criteria unclear 10%
Lack of participant demand 35% Lack of insurance company commitment 3%
Primary concerns with in-plan insurance products
IN-PLAN INSURANCE PRODUCT CONCERNS
21
DC plan design will evolve to build and seek to preserve
retirement assets
Importance and growth of DC assets may drive increase in:
Institutional, professionally managed and open architecture defaults
Broadly diversified and balanced core line ups
Retiree asset retention and more income-focused solutions
22
Biography
Stacy Schaus
CFP®, DC Practice Leader, PIMCO
Ms. Schaus is an executive vice president in the Newport Beach office and leads PIMCO's Defined
Contribution Practice working primarily with plan sponsors and consultants. She has written
extensively on defined contribution issues, including the regular publication PIMCO DC
Dialogue™ and her 2010 book, Designing Successful Target-Date Strategies for Defined
Contribution Plans. Prior to joining PIMCO in 2006, she was a founder and president of Hewitt
Financial Services, which includes DC investment consulting and research as well as brokerage
and personal finance.
She is the founding chair for the Defined Contribution Institutional Investment Association, serves
on the executive committee of the Employee Benefit Research Institute and served as a Financial
Planning Association board member. She has 32 years of investment experience and holds an
MBA from the Stern School of Business at New York University and an undergraduate degree
from the University of California, Santa Barbara.
23
About the PIMCO DC Practice
The PIMCO DC Practice is based in Newport Beach and is dedicated to promoting effective DC plan design and innovative retirement solutions. Our team is pleased to support
our clients and broader community by sharing ideas and developments in DC plans in the hopes of fostering a more secure financial future for employees of corporations, not-
for-profits, governments and other organizations.
If you have a topic you’d like to discuss, please contact your PIMCO representative or email us at pimcodcpractice@pimco.com. We’re interested in your ideas and
feedback!
Past performance is not a guarantee or a reliable indicator of future results. This report is provided for informational purposes and should not be construed as a
solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction.
A Word About Risk: PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features. Investing in the
bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by
changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as
interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market
liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled
securities may involve heightened risk due to currency fluctuations and to economic and political risks, which may be enhanced in emerging markets. Certain U.S. Government
securities are backed by the full faith of the government. Obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not
backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a
government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise.
Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax
laws or failure to qualify for tax-free pass-through of income. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not
be suitable for all investors. Stable value wrap contracts are subject to credit and management risk. Derivatives may involve certain costs and risks such as liquidity, interest rate,
market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested.
The survey results contain the opinions of the respondents and not necessarily those of PIMCO. Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of
any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written
permission.
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PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management
Company LLC, respectively, in the United States and throughout the world. ©2014, PIMCO.
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