SLF SESSION | New Drivers of the Retirement Market

Forces of Change in an Evolving Retirement Market

Agenda

1. Retirement Market Trends

2. Forces of Change

3. Successful Strategies

After 40 Years of 10%+ Compound Annual Growth, the US Retirement Market is Now Worth $25 Trillion

1975 1980 1985 1990 1995 2000 2005 2010 2015*0

5

10

15

20

25$ Trillions

Total US Retirement Assets12/31/1975 – 6/30/2015

*As of June 30, 2015Source: Investment Company Institute

Nearly 60% of the $25 Trillion Retirement Market Now Sits in Individually Directed Accounts

1975 1995 2015*

18%

25%

28%38%

22%12%22%

19% 15%9% 7% 6%

12% 8% 9%

18%31% IRAs

DC

Private DB

Gov't DB

Federal DB

Annuities

*As of June 30, 2015Source: Investment Company Institute

Historical Share of US Retirement Market by Plan Type12/31/1975 – 6/30/2015

Defined Contribution Market by Plan Size

Plan Size Assets Plans Participants

< $10MM 13% 95% 25%

$10MM - $49MM 11% 4% 16%

$50MM - $499MM 24% 1% 27%

$500MM+ 53% 0.2% 33%

Total $6.8 trillion 843 thousand 95 million

Source: PLANSPONSOR 2015 Recordkeeping Survey, Investment Company Institute

Forces of Change

REGULATIONLifetime income illustrationsLifetime annuities as QDIAFiduciary standard

STRATEGIESOpen architectureIncome, annuities & altsAsset allocation solutions

DEMOGRAPHICSIncreased contributions

Delayed retirement

VEHICLESFlexible pricing

CITs and ETFsCustom solutions

BetterRetirementOutcomes

Demographics Favor Asset Accumulation

DC plans have benefited from:• Huge numbers of baby boomers living through their peak earning years• High deferrals from base salaries • The ability to take advantage of catch-up contributions

Plan participants are nevertheless aware of their lack of preparedness• Retirement plans are being pushed back• Asset accumulation will continue longer than previously predicted

The Power of Regulation

1975 1980 1990 2000 20101985 1995 2005 2015

DC plans were originally meant to provide supplemental savings alongside employer-sponsored pensions and Social Security

Rising costs and risks in the 1990s and 2000s cause some firms to close or freeze DB plans while many newer companies to only offer DC plans

By 2015, DC plans account for $7 trillion of retirement assets

2006The Pension Protection Act fuels growth of automatic enrollment and use of target-date strategies

1974 ERISA begins shift toward individual responsibility and lays the groundwork for 401(k) plans

Regulatory Focus on Improving Retirement Outcomes Creates Challenges as Well as Opportunities

Lifetime income illustrations• DOL requirements for lifetime income illustrations on statements may alter behavior • Potentially higher deferral rates, signing up for auto-escalation, or deferring retirement

Lifetime annuities in QDIAs• DOL and Treasury guidance on lifetime annuities in QDIAs• Lifetime annuities may drastically improve the retirement outlook of Generations X and Y

Fiduciary rule• DOL’s efforts to apply fiduciary standard to IRAs may slow rollovers out of DC plans• Further innovations and product trends may create more disincentives to move assets from DC plans to

IRAs

Ongoing Product Innovation by Managers

OutcomeOrientedSolutions

AssetAllocationSolutions

LiquidAlternatives

OpenArchitecture

Annuities

Retirement Income

Target-Date Funds Grow Steadily, while Target-Risk Funds Continue to Face Headwinds

Target Date & Target Risk Fund Assets and Net Flows12/31/2005 – 9/30/2015

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD0

100

200

300

400

500

600

700

800

-10

0

10

20

30

40

50

60

70

Target Date Assets Target Risk AssetsTarget Date Net Flows Target Risk Net Flows

Assets($B)

Net Flows($B)

*As of 9/30/2015Source: Strategic Insight

Target-Date Fund Innovation

Open-architecture• More than half of “off-the shelf” target-date products (including MF and CIT) feature unaffiliated managers• However, only 16% of such funds’ assets are managed by unaffiliated managers

Tactical management• Half of “off-the-shelf” products have the ability to make tactical adjustments. • Tactical flexibility ranges from 2% to no limit across the products, with a median of 10%.

Alternatives• There are 11 target-date mutual fund series identified as having distinct allocations to underlying funds that

are deemed “alternative” • These series in total account for 8% of total target-date mutual fund assets 7% of year-to-date through net

flows• Among these series, the average exposure to alternative underlying funds (across all vintages) was 6.2%

Blending active and passive• 40% of off-the-shelf target-date products use a hybrid method of portfolio construction

Liquid Alternatives Account for Roughly $230B across 20+ Classifications as well as Global Unconstrained Funds

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD0

50

100

150

200

250

300

0

10

20

30

40

50

60Assets Net Flows

Assets($B)

Net Flows($B)

Alternative Fund Assets and Net Flows12/31/2005 – 9/30/2015

Source: Strategic Insight

Continuous Improvement Means Mutual Funds and Collectives Increasingly Dominate the Market

2011 2015* 2020* 2025*0

2

4

6

8

10

12

Mutual Funds

Separate Accounts

Collectives

Company Stock

Brokerage, ETF & Other

$ Trillions

Defined Contribution Plan Assets by Vehicle Structure12/31/2011 – 12/31/2025 (Projected)

*ProjectionsSource: Strategic Insight

Comparison of Investment Vehicles Used in DC Plans

MF CIT Sep. Acct. ETF

Daily Liquidity Yes Yes Variable Yes

Transparency for Participant High Low Low High

Transparency for Plan Sponsor High High Moderate High

Availability in Retail Market Yes No No Yes

Customizability Limited Limited High No

Source: Strategic Insight

Vehicle Use Varies with Plan Size

MFsSep. Accts.CITsETFs**Other0%

20%

40%

60%

80%

100%

OVERALL

MEGA

LARGE

MID

SMALL

MICRO

% of Plans

Investment Vehicles Used by Size* of Defined Contribution Plan As of 2014

* Micro=<$5MM; Small=$5MM –$50MM; Mid=>$50MM –$200MM; Large=>$200MM –$1B; Mega=>$1B** Outside of brokerage windowSource: PLANSPONSOR

Collective Investment Trusts: The Basics

• What are they?– Pooled investment vehicles for qualified retirement plans only– Not publicly available – Established by banks or trust companies that act as fiduciaries

• Who governs them?– Regulated by the OCC or state banking entities– Exempt from SEC regulation and not subject to the Securities Act of 1933 or

the Investment Company Act of 1940

• Where are they available? – Used by both defined contribution and defined benefit plans– Cannot currently be distributed in the 403(b), section 457(f) or IRA markets

The Benefits of CITs

FLEXIBILITY

Multiple fee classes allow sliding fee schedule based on invested assets

PRICING

Low costs vs. mutual funds due to different regulatory burden and other factors

SPEED TO MARKET

30% to 50% less time than launching comparable mutual fund

NSCC TRADING

Trading through the NSCC provides same operational efficiencies as mutual funds

Case Study #1: Large MF Firm Creating a CIT as a Component of their Offering

SITUATION• T

o attract U.S. retirement plan assets, a firm offering a wide range of solutions across many asset classes needed to create collective investment fund share classes that would complement existing MF classes

SOLUTION • S

EI created affiliate branded, multi-share, multi-fund collective investment trust vehicles that enabled the firm’s affiliates to attract U.S. retirement plan assets

BENEFITS• W

ith the CITs in place, the firm successfully attracted institutional investors and significantly increased assets under management

Case Study #2: Non-U.S. Manager Establishing CIT to Enter U.S. Retirement Market

SITUATION• A

leading international asset management firm acquired a U.S. mandate for $500+ MM on the condition that the vehicle they use to establish themselves in the U.S. institutional market be a CIT

SOLUTION • S

EI retained the firm as a sub-advisor for an international equity collective investment trust implemented through the SEI Trust Company

BENEFITS• F

irm was able to take advantage of the efficiency and flexibility of CITs to offer a customized, cost-effective solution for retirement investors

Case Study #3: Large Corporation Needing a Pooled Vehicle Solution

SITUATION• A

major global enterprise planning to restructure their operations wanted their 401(k) plan to be in a pooled vehicle, so that assets could be easily separated when the firm split into multiple entities

SOLUTION • S

EI established a CIT structure with:• 2

1 underlying funds, including 11 target-date funds

• Up to six manager sub-funds in each direct strategy

• Over 20 underlying managers and $15 B in assets

BENEFITS• E

asy allocation of interests post-restructuring

• Cost efficiencies

• No disruption to plan participants

• Leverage when negotiating fees with managers

Case Study #4: A Large Integrated Managed Care Consortium that Required a Turnkey Mutual Fund Trust

SITUATION• A

n integrated managed care consortium that wanted to enhance their employees’ retirement program by offering low-cost, custom target-date mutual funds in an open-architecture structure.

• Firm needed to use mutual funds because they not only had a 401(k) plan but also a 403(b) plan.

SOLUTION • S

EI created a proprietary mutual fund infrastructure leveraging their Advisors’ Inner Circle Series Trust platform.

• Advisor enabled to build custom target date funds using multi-manager structure to execute investment strategy for each target date fund.

BENEFITS• T

urnkey structure that addressed all facets of custom target date mutual funds.

• Infrastructure built in a very short time frame

• Cost-effective; scalable

Conclusion1. Robust but maturing market

2. Public policy & regulation continues to shape the retirement market

3. Unbundling continues

4. Product evolution to more outcome orientation

5. Multi vehicle usage expands

SLF SESSION | New Drivers of the Retirement Market

Economy & Finance

Transcript of SLF SESSION | New Drivers of the Retirement Market