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  • Defined Contribution

Industry Voice: DC solutions: Value for money — for a lifetime

Everyone wants VFM—but what represents value, and for whom?

  • AllianceBernstein
  • 11 December 2020
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With target date funds (TDFs) as the default choice, defined contribution (DC) pension plan members default to a single fund through to retirement. This approach streamlines both administration and investment management and can help bring cost savings.

In the following sections we provide illustrative data to show why a TDF solution can represent attractive value based on all-in lifetime costs and benefits, and how competing solutions with lower management fees may lack the same level of capability.

The Quest for Value For Money: 

Everyone wants Value For Money—but what represents value, and for whom?

Different pension plans have different members with varying needs. And they have different sponsors with varying levels of financial resources and willingness to finance high quality pension provision. Pension plans whose fiduciaries seek high quality investment solutions with good governance and customization  capabilities will perceive value differently than fiduciaries seeking a basic, low-cost packaged solution. So it's important to recognize that there's a spectrum of client needs, and that VFM must be interpreted relative to a pension plan's positioning on that spectrum.

We believe that costs and benefits should be both fully transparent and considered in their entirety across a pension plan's arrangements. An effective comparison of competing DC arrangements should itemize both costs and benefits on a line-by-line basis so that every component—both explicit and implicit—can be considered in context. In this way, fiduciaries can determine the features they really value and what approach represents the best solution for them and their members.

In the illustrative display in our paper, we show approximate annualized cost estimates for trust-based DC pension provision, comparing a trustee-led bespoke lifestyle solution with a TDF solution. We have based our numbers on a notional pension plan with 10,000 members and £250 million in assets, using data from industry-wide surveys and working papers,* as well as our own experience. And we have included additional explanatory columns to illustrate how and why differences between the two approaches arise.

With a lifestyle approach, fiduciaries incur multiple costs across different service providers—not only from the asset managers, but also advisors, administrators and platform providers. With TDFs, the same service providers are involved. However, by investing each default member in just one single TDF, the number of transactions can be greatly reduced, as can the resource dedicated to administration, monitoring and reporting, communications and advice.

Essentially, in our explicit cost analysis, TDFs typically have higher investment management fees. But that is more than made up for by increased efficiencies and value adding "free" services from TDF managers that would otherwise incur a separate cost within a lifestyle arrangement. In terms of implicit benefits, TDFs' higher customer service and improved governance give them a clear advantage. All in all, our analysis suggests that TDFs offer attractive VFM for fiduciaries that want a high quality product with embedded value-adding services and governance benefits.

Read the full paper to learn more, and view our comparison table of charges and investment costs, and customer service and governance costs.

 

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For Investment Professionals only. Not for inspection by, distribution or quotation to, the general public.

Past performance does not guarantee future results. The value of an investment can go down as well as up and investors may not get back the full amount they invested. Before making an investment, investors should consult their financial advisor.

IMPORTANT INFORMATION

Note to All Readers: The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor's personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates. Note to Readers in Europe: This information is issued by AllianceBernstein Limited, a company registered in England under company number 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA - Reference Number 147956). The [A/B] logo is a registered service mark of AB and AllianceBernstein® is a registered service mark used by permission of the owner, AllianceBernstein.

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