Mercer issued a short survey (19 questions) in May 2011 to assess plan sponsor's views on investment trends in defined contribution (DC) plans - such as the use of inflation protection options and other asset classes as standalone options, the trend in target date/target risk options and the usage of investment advice/managed accounts. Below are some of Mercer's key findings:
- Protecting participants from potential inflation is a key topic among plan sponsors. Notably, 46% of sponsors offer or intend to offer an inflation protection option. TIPS (Treasury inflation protected securities) are offered as a standalone option in nearly one quarter of surveyed plans, although inflation-sensitive options that are made up of multiple asset classes are gaining traction.
- Among "non-core" asset classes, emerging market equity, international small cap equity and high yield are the preferred strategies among sponsors. Strategies such as gold, commodities and hedge fund/absolute return are not commonly offered, and sponsors do not plan to offer them over the next year.
- Mutual funds continue to be the most prevalent investment vehicle in plans. Plans above $1 billion utilize more separate accounts and collective trusts than smaller-sized plans. For sponsors that are moving away from mutual funds, reducing investment fees is the overriding objective.
- The percentage of participant assets invested in target date options is relatively modest, as 38% of sponsors indicated that 10% or less of plan assets are in these funds. We expect this figure to rise rapidly in the coming years as a result of participant default and re-enrollment activity.
- The use of custom target date options varies significantly by plan asset size. Seven percent of all plans utilize custom target date options. For plans above $5 billion, custom construction rises by 20%.
- While 50% of plans offer investment advice and/or managed accounts, usage among participants is very low. For investment advice, 68% of sponsors indicated that usage is 10% or less, and 71% of sponsors indicated that managed account usage is also 10% or less.
- Of those respondents that offer fixed payout options, the majority of sponsors (80%) offer participants the option to purchase an annuity at retirement outside the plan. The payout of income is typically provided via a standalone investment option (59%) rather than as a component of a target date fund allocation.
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