Industry Voice: DC solutions: Value for money — for a lifetime
Everyone wants VFM—but what represents value, and for whom?
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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