Financial News

Retirement Industry People Moves - Fri, 02/15/2019 - 19:06

Art by Subin Yang

Senior Consultant Joins PEI

Portfolio Evaluations, Inc. (PEI), an institutional investment and retirement plan consulting firm, has added senior consultant Duncan McNiff to the team.

“We are pleased to have Duncan join the team,” says Partner Richard Torbinski. “His extensive experience in defined contribution plan vendor relationship management will be a big asset to our firm and clients.”

Prior to joining the firm, Duncan was a relationship manager with the Vanguard Group, where he consulted with 25 plans representing over $2 billion in assets and more than 20,000 participants. He is a graduate of Princeton University with a bachelor’s degree in politics and is fluent in both French and Mandarin Chinese. 

“Portfolio Evaluations has a long track record of providing objective, smart advice to plan sponsors,” says Duncan. “For me, this is a great opportunity to focus on what I enjoy most: working with clients to solve their problems by providing the honest support they need. Over the past ten years, I’ve had the benefit of working in conjunction with PEI to assist mutual clients on countless occasions, and I feel very fortunate to now be joining their team.”

Industry Consultant Moves to SageView

Brian Mahoney joined SageView Advisory Group as a retirement plan consultant in its Boston, Massachusetts office on January 14. 

Mahoney brings 20 years of retirement benefit experience, both in recordkeeping and as a plan sponsor, to the Boston team. He graduated from Saint Anselm College in 1999 and joined MFS as a retirement plan administrator. In 2011, he became the retirement plan administrator for Boston Children’s Hospital, overseeing its fund line-up consolidation among other projects, before returning to MassMutual as a consultant on its Regulatory Advisory Services team in 2015. 

“Helping plan sponsors achieve their goals while being a part of a strong team is what drew me to SageView. The resources and the way they support plan sponsors is similar to my own approach.” says Mahoney. 

Mahoney joins a team led by Stephen Popper and includes Mark Forkey, Erica Washburn, Mark Foster, Kerrie Casey and Linda Gallinaro. The Boston team supports 78 client relationships with more than $12 billion in assets under advisement in both 401(k) and 403(b) plans, defined benefit (DB) and nonqualified plans.

“Brian’s industry and regulatory knowledge is a staple of how we help our clients be more successful,” says SageView Founder and CEO Randy Long. “With HR and Benefits teams leaning on us for more consulting work, bringing on a former plan sponsor with a retirement industry background is a welcome addition. We are thrilled to have Brian on board.”

Strategic Insight Appoints Morningstar Veteran As Research Head

Strategic Insight (SI) has added 19-year veteran of Morningstar, Christopher Davis, as head of U.S Fund Research. In this new role, Davis will be responsible for shaping SI’s team of U.S. research analysts.

“Research has long been a significant pillar in the Strategic Insight ecosystem alongside our data and business intelligence operations, and I am beyond excited for the opportunity to further strengthen this pillar,” says Goshka Folda, global head of Research at Strategic Insight and president/CEO of Investor Economics. “Bringing Christopher onto the team opens many doors to better serve the unique needs of our clients and enhance our culture of curiosity, learning and service.”

Davis comes to Strategic Insight from Morningstar, where he evaluated equity, fixed income, and multi-asset investment strategies, primarily in the U.S., for nearly two decades as an analyst and research director. Over his tenure, he introduced qualitative ratings on target-risk and exchange-traded funds (ETFs) and was an editor of Morningstar’s Fidelity Funds Newsletter. Davis also led Morningstar’s Canadian manager research team from 2012 to 2016.

SI Research delivers a combination of published research, online webcasts, in-person presentations, and on-demand consulting. Davis will lead the U.S. Research team alongside SI’s Canadian, Australian, and EMEA research teams.

NIRS Positions Third Executive Director

Dan Doonan has been selected to lead the National Institute on Retirement (NIRS), a non-profit, non-partisan retirement research organization located in Washington, D.C. Doonan will assume the role of executive director beginning March 11, and will serve as NIRS’ third executive director. He follows Diane Oakley, who will be retiring.

Doonan comes to NIRS after serving as a senior pension specialist with the National Education Association. He began his career at the Department of Labor (DOL), and then spent seven years performing actuarial analysis with Buck Consultants in its retirement practice. His experience also includes positions as a research director and labor economist.

“As evidenced by his diverse experience, Dan is an outstanding fit to lead NIRS’ research and education mission. He has a deep knowledge of pension and retirement issues, and he is passionate about ensuring all Americans are financially secure in retirement,” says Dick Ingram, NIRS board chair.

TRA Acquires Pensions Administration Firm

The Retirement Advantage, Inc. (TRA) has acquired Quality Pension Services, Inc., a pension administration firm, headquartered in Chico, California.

With the completion of the acquisition on February 1, this transaction increases the assets under administration (AUA) of the retirement plans to over $8 billion.

“Adding Quality Pension Services retirement services business enhances our already strong position as a leader in the retirement services industry and complements our high-touch, relationship-based service model,” says TRA President Matt Schoneman. “We’re committed to growing our business. Tapping into Quality Pension Services network will allow us to exceed expectations and develop new relationships in the region.” 


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Categories: Financial News

Lawmakers Ask GAO to Examine Cybersecurity of Retirement System - Fri, 02/15/2019 - 17:24

Senator Patty Murray, D-Washington, Ranking Member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and Congressman Bobby Scott, D-Virginia, Chairman of the House Committee on Education & Labor, sent a letter to Gene Dodaro, Comptroller General of the U.S. Government Accountability Office (GAO), requesting that the GAO examine the cybersecurity of the retirement system.

The letter identifies 10 questions the lawmakers would like the GAO to answer, following its examination.

“Retirement savings held in defined contribution plans, like 401(k) plans, have grown steadily in recent years, reaching over $5 trillion in 2017. These savings, the new methods of connecting savers with their retirement plans, and the digital interactions between the plans and their service providers hold great promise for both increasing financial literacy and improving financial security for retirement. At the same time, they are also a tempting target for criminals who could hack into plans and individuals’ accounts to access information, commit identity fraud, and steal retirement savers’ nest eggs. It is important that workers and retirees know their savings are in fact safe, and that a cyberattack will not throw the retirement they have spent years working and planning for into jeopardy,” they wrote.

According to Summer Conley, partner in the Los Angeles office of Drinker Biddle & Reath LLP, and Michael Rosenbaum, a partner in the firm’s Chicago office, the Employee Retirement Income Security Act (ERISA) regulation governing electronic disclosure of plan communications requires that plan fiduciaries take “appropriate and necessary” steps designed to make sure the electronic system for providing plan information protects the confidentiality of personal information and includes measures designed to prevent unauthorized access to it. Thus, a retirement plan committee has an obligation to protect participant information provided through an electronic system.

The ERISA Advisory Council asked the Department of Labor (DOL) to provide guidance on how plan sponsors should evaluate the cybersecurity risks they face and to require them to be familiar with the various security frameworks used to protect data as well as to build a cybersecurity process.

A new Aon plc report highlights that as companies continue to use technology to speed up the transfer of information, not only are game-changing business opportunities created, but so is increased cyber risk.  The Segal Group has recommended steps defined contribution (DC) plan sponsors can take to hedge against cybersecurity risk.

At least one DC plan provider, John Hancock Retirement Plan Services (JHRPS), offers a Cybersecurity Guarantee to reimburse eligible participants for unauthorized transfers from their 401(k) retirement accounts.

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Categories: Financial News

Expansion of Technology Will Increase Cyber Security Threats - Fri, 02/15/2019 - 16:18

Aon plc released its 2019 Cyber Security Risk Report, which details the greatest cyber security threats and challenges organizations are currently facing.

However, the report also highlights that as companies continue to use technology to speed up the transfer of information, not only are game-changing business opportunities created, but so is increased cyber risk. 

The “What’s Now and What’s Next” report focuses on eight specific risk areas that companies may face in 2019. They illustrate how, thanks to rapid enhancements and constant changes in technology, the number of touch points that cyber criminals can access within a business is growing exponentially.

According to the report:

  • While technology has revolutionized the way organizations today conduct business, broader and wider-spread use of technology also brings vulnerabilities. From publishing to automotive, industries are facing new, evolving services and business models. These new opportunities however, bring with them a radically different set of risks, which organizations will need to anticipate and manage as they continue the digital transformation process.
  • Two prevailing supply chain trends will heighten cyber risks dramatically in the coming year: one is the rapid expansion of operational data exposed to cyber adversaries, from mobile and edge devices like the Internet of Things (IoT); and the other trend is companies’ growing reliance on third-party—and even fourth-party—vendors and service providers. Both trends present attackers with new openings into supply chains, and require board-level, forward-looking risk management in order to sustain reliable and viable business operations.
  • IoT devices are everywhere, and every device in a workplace now presents a potential security risk. Many companies don’t securely manage or even inventory all IoT devices that touch their business, which is already resulting in breaches. As time goes on, the number of IoT endpoints will increase dramatically, facilitated by the current worldwide rollouts of cellular IoT and the forthcoming transition to 5G. Effective organizational inventory and monitoring process implementation will be critical for companies in the coming year and beyond. 
  • Connectivity to the Internet improves operational tasks dramatically, but increased connectivity also leads to new security vulnerabilities. The attack surface expands greatly as connectivity increases, making it easier for attackers to move laterally across an entire network. Further, operational shortcuts or ineffective backup processes can make the impact of an attack on business operations even more significant. Organizations need to be better aware of, and prepared for, the cyber impact of increased connectivity.
  • Employees remain one of the most common causes of breaches. Yet employees likely do not even realize the true threat they pose to an entire organization’s cyber security. As technology continues to impact every job function, from the CEO to the entry-level intern, it is imperative for organizations to establish a comprehensive approach to mitigate insider risks, including strong data governance, communicating cyber security policies throughout the organization, and implementing effective access and data-protection controls.
  • Projections anticipate that M&A deal value will top $4 trillion in 2018, which would be the highest in four years. The conundrum this poses to companies acquiring other businesses is that while they may have a flawless approach to cyber security enterprise risk, there is no guarantee that their M&A target has the same approach in place. Dealmakers must weave specific cyber security strategies into their larger M&A plans if they want to ensure seamless transitions in the future.
  • Increased regulation, laws, rules and standards related to cyber are designed to protect and insulate businesses and their customers. The pace of cyber regulation enforcement increased in 2018, setting the stage for heightened compliance risk in 2019. Regulation and compliance, however, cannot become the sole focus. Firms must balance both new regulations and evolving cyber threats, which will require vigilance on all sides.
  • Cyber security oversight continues to be a point of emphasis for board directors and officers, but recent history has seen an expanding personal risk raising the stakes. Boards must continue to expand their focus and set a strong tone across the company, not only for actions taken after a cyber incident, but also proactive preparation and planning.

Hogg, CEO of Cyber Solutions at Aon, says, “Our 2019 report also shows that organizations must recognize the need to share threat intelligence across not only their own network but with others as well. While it may seem counterintuitive when thinking about cyber security, collaboration within and across enterprises and industries can keep private data of companies and individuals alike safer. Working together can result in improved efforts to hunt bad actors, while also raising the bar and making all parties more prepared for the inevitable day when a disruption does happen.”

Aon’s 2019 Cyber Security Risk Report may be downloaded from here.

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Categories: Financial News

Bill Introduced to Help Employers Offer Student Loan Repayment Benefit - Fri, 02/15/2019 - 15:57

Senators John Thune, R-South Dakota, and Mark Warner, D-Virginia, have introduced the Employer Participation in Repayment Act, which would permit employers to contribute up to $5,250 tax-free to their employees’ student loans.

The bill would expand the Employer Education Assistance Program, which only provides assistance for workers who are seeking additional education, but does not benefit individuals who already have incurred student loan debt. The legislation has also been introduced in the House of Representatives by Reps. Rodney Davis, R-Illinois, and Scott Peters, D-California, and has support from numerous educational organizations.

The senators issued a press release noting that one in four Americans have student loans, and that these loans total $1.5 trillion in the U.S.

“Today’s economy is strong, and I believe we should keep our foot on the gas by passing commonsense bills like the one Senator Warner and I have proposed that would give young career seekers additional tools to help overcome the burden of student loan debt and empower employers to attract future talent,” Thune said. “It’s no secret that as today’s college graduates look toward the next chapter in life, they often trade their cap and gown for debt and uncertainty. This bipartisan legislation, which I view as a win-win for graduates and employers, is good policy and one that I hope garners strong support.”

Warner added: “As the first in my family to graduate from college, I relied on student loans when college tuition was much lower than it is today. Unfortunately, as the cost of higher education continues to skyrocket, so has the rate of Americans who turn to student loans to pay for college. That’s why I’ve teamed up with Senator Thune to create an innovative, bipartisan approach to help ease the burden of student loans. By making employer student loan repayments tax-exempt, employers will have a new tool to recruit and retain a talented workforce while also helping working Americans manage their financial future.”

Full text of the legislation can be found here, and a summary can be found here.

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Categories: Financial News

Public Pension Plan Sponsors Struggle to Contribute Sufficiently to Plans - Thu, 02/14/2019 - 19:01

Between 2005 and 2016, employer contributions to 133 large state and municipal pension plans more than doubled from $42.4 billion to $88.1 billion; however, during that same period, the unfunded liabilities of these plans grew 245% from $290 billion in 2005 to $1.0 trillion in 2016, according to an analysis from the Society of Actuaries (SOA).

Most of the plans studied received insufficient contributions to reduce their unfunded liabilities, assuming all actuarial assumptions were met exactly. In 2003, while still feeling the impact of the dot-com market crash, 55% of plans received insufficient contributions to reduce their unfunded liabilities. After reeling from the 2008 market crash, the percentage of such plans peaked at 84% in 2011 before falling to about 63% for 2016 and 2017.

The study considers three primary benchmarks for assessing employer contributions to public pensions:

  • Target Contribution – Since 2014, the target contribution is the actuarially determined contribution (ADC) computed by the plan actuary for disclosure under Government Accounting Standards Board (GASB) guidelines, if such a figure was reported. The ADC may or may not represent the contribution determined under the plan’s funding policy. In some cases, the target contribution represents a value reported as “required contribution” or something similar. For years prior to 2014, the target contribution represents a similar concept, the annual required contribution (ARC) as GASB required prior to 2014. The analysis compares the target contribution for a given fiscal year to the contributions made for the same fiscal year.
  • Reduce unfunded liability as a dollar amount (UL$). In technical terms, this benchmark is the cost of current benefit accruals (normal cost) with interest to mid-year plus a year’s interest on the unfunded liability, discounted for payment at mid-year. This benchmark reflects a common understanding of funding pension plans.
  • Reduce unfunded liability as a percent of payroll (UL%). Except for the interest rate, the formula for computing this benchmark is the same as for reducing UL$. In this case, the interest rate is net of assumed payroll growth. This benchmark reflects another common but somewhat more complex understanding of funding pension plans relative to budgeting of salary-related employee costs.

The analysis found the percentage of plans receiving contributions at least equal to their Target Contribution remained somewhat stable during the years studied. In fiscal year 2003, 54% of plans received at least their Target Contribution, and 51% of plans received at least their Target Contribution in fiscal year 2017. Between 2003 and 2017, the percentage of plans that received at least their Target Contribution ranged from 44% to 62%, but neither consistently above nor consistently below 50%.

The percentage of plans that received insufficient contributions to reduce their UL$ increased from 55% in 2003 to 72% in 2005, at least partly a result of the dot-com crash in the early 2000’s. By 2008, generally prior to the 2008 market crash, the percentage was down to 58%, only slightly above the 2003 level. While most plans at the start of 2008 received insufficient contributions to reduce their UL$, the contributions of 42% of plans did reduce their UL$. At the worst point following the 2008 market crash, the percentage of plans that received insufficient contributions to reduce their UL$ peaked at 84%, in 2011. Since then the percentage generally declined to 63% for 2016-2017, meaning that 37% of plans received sufficient contributions to reduce their UL$.

Some plans that received insufficient contributions to reduce their UL$ did receive sufficient contributions to reduce their UL%. In 2003, 16% of plans received sufficient contributions to reduce their UL$, but 36% of plans received sufficient contributions to reduce their UL%. In 2017, 35% of plans received sufficient contributions to reduce their UL$, but 77% of plans received sufficient contributions to reduce their UL%.

In general, the proportion of plans with unfunded liabilities has been increasing since the dot-com crash. In 2003, 29% of plans had a funding surplus, meaning 71% had unfunded liabilities. By 2009, 88% of plans had unfunded liabilities, and in 2017, 97% of plans had an unfunded liability.

Authors of the study report analyzed the 107 plans that had at least 14 years of data sufficient for analysis and an unfunded liability in at least one of those years (the 14 years may not be consecutive). During 2002 to 2017, many of the plans regularly received insufficient contributions to reduce their unfunded liabilities. Of the 107 plans studied, 86 plans (80%) received insufficient contributions to reduce their UL$ at least half of the time, while 40 plans (37%) received insufficient contributions to reduce their UL% at least half of the time.

Twelve plans (11%) always received insufficient contributions to reduce their UL$, but no plans’ contributions were always insufficient to reduce their UL%. On the other end of the spectrum, 7 plans (7%) always received sufficient contributions to reduce their UL$, 12 plans (11%) always received sufficient contributions to reduce their UL%.

The SOA report concludes that plans that received insufficient contributions to reduce their UL$ in the short term may have a funding policy that will fully fund the plan over the long term. However, a significant portion of these plans received less than their target contributions, which may indicate that their plan sponsors were not following the plans’ funding policies.

The amortization approach, if any, used in computing the target contribution can influence whether contributions reduce the unfunded liability as a dollar amount. When the amortization approach does not reduce the UL$, the amortization approach is said to entail negative amortization.

The SOA concedes that employer contribution amounts are only one of many factors that influence pension plans’ funded status, including approaches to plan, cost and risk management; asset allocation; investment experience; changing plan demographics; actuarial methods and assumptions for computing plan liabilities; relatively long budget planning cycles; and contribution decisions that may be subject to legislative processes.

The full report from the SOA may be downloaded from

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Categories: Financial News

Investment Product and Service Launches - Thu, 02/14/2019 - 18:07

Art by Jackson Epstein

FTSE Russell Creates Index Series for Asset Allocation Strategies

FTSE Russell has introduced the FTSE Market Based Allocation Index Series. The new series initially comprises five indexes designed for use by the U.S. wealth management and financial advisory community and other multi-asset investors, bridging a gap in index coverage for this important and growing market and demonstrating FTSE Russell’s continued expansion of its multi-asset capabilities. 

“We’re excited to be able to draw on our extensive index capabilities across equity and fixed income to offer a unique tool to meet a clear need for our clients,” says Susan Quintin, managing director of Global Product Management. “The new index series bridges a gap in the investment community and will establish a new industry standard for defining risk tolerance levels and benchmarking asset allocation investment strategies.”

FTSE Russell developed this new index series in response to feedback from customers. U.S. wealth managers, financial advisers and other multi-asset investors can now choose from five indexes, ranging from conservative to aggressive, with objectively defined risk profile levels. The asset allocation levels for each index reflect the average asset allocation levels of real-world multi-asset funds as reported in Morningstar’s fund database. The indexes are overseen by FTSE Russell’s global governance framework and can be used to benchmark asset allocation-based investment strategies or as the basis for portfolio construction and research.

Legg Mason Reveals Short-Duration ETF

Legg Mason announced the launch of its newest actively managed exchange-traded fund (ETF), the Western Asset Short Duration Income ETF (WINC).

A short-duration (zero to three years) fixed-income strategy, WINC seeks to generate current income via a diversified portfolio with an emphasis on low interest rate sensitivity, higher credit quality and active credit selection.

“We are pleased to add this exciting new actively managed income-seeking fund, offered in a cost-effective, investor-friendly ETF wrapper,” says Michael Buchanan, deputy chief investment officer of Western Asset. “WINC targets short-duration credit exposure while leveraging Western Asset’s global investment capabilities and strong risk management program, employing an active process that is both top-down and bottom-up to help identify attractive credit and income opportunities while actively managing risk. While always opportunistic, we are dedicated to providing investors with a long-term fundamental value discipline.”

As an exchange-traded fund (ETF) vehicle, WINC offers intra-day liquidity and can be traded throughout the day. The transparency afforded by the availability of daily holdings may allow investors to make more informed investment decisions. WINC is on a monthly income distribution schedule.

The portfolio managers of the Western Asset Short Duration Income ETF are S. Kenneth Leech, Michael Buchanan, Ryan Brist, Blanton Keh and Kurt Halvorson. Performance is reference benchmarked against the Bloomberg Barclays 1 to 5 Year Corporate Bond Total Return Index.

The fund takes an “all-weather” approach to income, using both offensive and defensive strategies to proactively target higher-quality income opportunities. Having the ability to look beyond core holdings to expand the opportunity set can allow Western Asset to potentially provide attractive income throughout different market cycles.

Schwab Announces Additions to ETF OneSource

Schwab has announced that the Schwab ETF OneSource will double its lineup and add iShares exchange-traded fund (ETFs) to its menu. With these additions, Schwab clients will be able to buy and sell 503 ETFs covering 79 Morningstar Categories with zero-dollar online commissions, no enrollment requirements and no early redemption fees or activity assessment fees.

Starting on March 1, iShares ETFs will join the program with 90 funds, and Invesco, State Street Global Advisors SPDR ETFs and WisdomTree will add to the number of ETFs they already make available commission-free to Schwab clients. Aberdeen Standard Investments, ALPS Advisors, Direxion, Global X ETFs, John Hancock Investments, J.P. Morgan Asset Management and PIMCO—all current participants in the Schwab ETF OneSource program—are also adding funds to the lineup.

“We’re very proud of the role that Schwab ETF OneSource has played in making ETF investing more affordable and accessible for all investors,” says Kari Droller, vice president of third-party platforms. “Today, nearly three in four investors tell us that ETFs are their investment vehicle of choice, and portfolio allocations continue to rise steadily. Against that backdrop, we’re pleased to provide investors with significantly more choice and to welcome iShares ETFs to our family of providers.”

One of the first commission-free ETF programs in the industry, Schwab ETF OneSource launched in February 2013 with six providers and 105 ETFs. In six years, the program has expanded the number of providers participating in the program to 16, including Aberdeen Standard Investments, ALPS Advisors, DWS Group, Direxion, Global X ETFs, IndexIQ, Invesco, iShares ETFs, John Hancock Investments, J.P. Morgan Asset Management, OppenheimerFunds, PIMCO, State Street Global Advisors SPDR ETFs, USCF, WisdomTree and Charles Schwab Investment Management.

With this expansion, Schwab ETF OneSource will add ETFs in the following Morningstar Categories: communications, foreign small/mid-value, Latin America stock, long-term bond, multisector bond, muni California long, muni national intermediate, muni New York intermediate, world small/mid stock.

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Categories: Financial News

LDI Strategies and Preparing DB Plans for Recessions - Thu, 02/14/2019 - 17:27

During a webcast hosted by PGIM Fixed Income, speakers from across the organization dove deep into the current risk sources and return opportunities the firm sees in the equity and fixed-income markets, using the analysis to argue in favor of defined benefit (DB) plans adopting liability-driven investing (LDI) strategies.

The speakers included Tom McCartan, vice president of liability-driven strategies; Robert Tipp, chief investment strategist and head of global bonds; and Richard Piccirillo, senior portfolio manager of multi-sector strategies. While the group did not predict a recession is imminent in the U.S., they shared some sophisticated analysis of interest rate trends that may give pension plan sponsors reason to stop and think about the amount of risk exposure their portfolio has.

According to the speakers, “adopting LDI” in basic terms means changing the investing objective from maximizing returns to instead focus on meeting a specific funding goal over a specific time period. Setting such guidelines can allow a pension plan sponsor to better tailor the risk exposure to avoid large losses. This safety may potentially come at the expense of missing some of the upside, but that is not really significant if the pension plan is remaining more stable and is able to smoothly and surely pay out the benefits owed to beneficiaries. 

The speakers said LDI is growing even more important as pension plans broadly move into a phase where they are not growing but instead need to be focused on meeting their benefit obligations. They said that plan sponsors must acknowledge that, when there is eventually another downturn, it is going to be harder for market authorities and governments around the world to revive the economy. This is because of all the easing that has happened since the Great Recession.

The speakers said debt levels remain incredibly high around the world, and so there is very little room for governments to stimulate the global economy through some of the traditional means if/when the next recession occurs. They noted how the U.S. has started, for its part, to tighten its monetary policy in response to strong growth and record-low unemployment. They said this was one of the main drivers of the equity market volatility of 2018 and early 2019.

The PGIM Fixed Income team had a few practical recommendations for pension plan sponsors to consider when it comes to adopting LDI and “getting off the funded status rollercoaster.” These include raising the pension plan’s interest rate liability hedge ratio to help mitigate interest rate risk; reducing spread duration and/or risk asset exposure to help lower funded status drawdown risk; moving from a market benchmark to a liability cash flow benchmark to help manage credit migration risk; and treating risk allocations and interest rate hedge ratios as distinct decisions to help achieve a high interest rate hedge ratio with desired risk asset exposure. Such strategies can be complex to design and operate, the speakers admitted, and will likely require the engagement of a specialist consultant or investment provider.  

Importantly, the speakers emphasized that the move to an LDI strategy is a serious decision requiring a diligent planning and execution process. They said plotting the rollercoaster exit strategy first requires that sponsors identify the primary risks to funded status. For most corporate defined benefit pension plans, they are declining long-term U.S. interest rates; tightening long-dated corporate spreads; credit migration in investment grade corporate bonds; and falling risk asset prices, principally in the U.S. and international equity markets.

The speakers concluded that pension plans have benefited from the rise in interest rates and strong equity markets following a long period of easy monetary policy and, more recently, the 2016 presidential election, fiscal stimulus and corporate tax reform. The said the fundamental question for pension plans to ask today is, “Should you stay on the funded status rollercoaster or move toward a recession-ready LDI strategy?”

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Categories: Financial News

Equity Compensation Increasingly Used for Financial Wellness and Retirement - Thu, 02/14/2019 - 17:12

Equity compensation programs are increasingly viewed as part of participants’ overall financial strategies, according to research from Fidelity Investments.

One-quarter of the 1,448 company stock plan participants surveyed indicated they would tap their retirement account if they needed cash (the same percentage as in Fidelity’s 2016 survey); however, 62% said they would sell company stock if they needed cash—an increase from 58% in 2016.

The 2018 survey found that when participants sold their company stock, 28% used the proceeds for paying bills or debt. Thirteen percent reinvested the proceeds in stocks/mutual funds, and 9% reinvested them in a retirement savings account. Nine percent each also reported they used proceeds as emergency savings and for college expenses, savings or student loan payments.

When asked how they plan to use the proceeds when they sell company stock, respondents indicated:

  • Reinvest in retirement account – 43% (This is the highest percentage ever recorded in Fidelity’s survey);
  • Reinvest in stocks/mutual funds – 13%;
  • Pay off bills/debt – 10%; and
  • Use for rainy day/emergency – 9%.

According to the survey, more than two-thirds of respondents (67%) consider company stock as part of their long-term investment plan.

Although 31% said their company stock will be important in retirement but they will rely on other savings first, 44% reported that their company stock will provide a “cushion” in retirement. Six percent said their company stock will be their primary source of retirement income (down from 7% in 2016).

“The results of this year’s survey really underscore the fact that the role of company stock continues to evolve and increase in importance in the eyes of employees, as well as play an increasingly important role in employees’ overall financial wellness,” says Emily Cervino, head of thought leadership, stock plan services at Fidelity Investments.

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Categories: Financial News

A Drop Off in Volatility in January Led to Scant Trading - Wed, 02/13/2019 - 19:34

With market volatility slowing in January, trading activity among 401(k) investors dropped off, according to the Alight Solutions 401(k) Index. In fact, January 2019 was the slowest start to the year in the more than 20-year history of the index.

The average daily activity for the month was 0.016%, lower than the 0.024% in January 2018 and the trailing five-year average of 0.025%.

Seventeen of 21 trading days, or 81%, favored fixed income funds. A mere four, or 19%, favored equities. During the month, there were only three above-normal trading days.

Inflows went mainly to bond (79%), small U.S. equity (8%) and stable value funds (6%). Outflows came primarily from large U.S. equity 43%), target-date funds (23%) and company stock funds (22%).

The average asset allocation in equities ticked upward to 67.6% at the end of January from 66.6% at the end of December. New contributions to equities also ticked upward, to 67.7% in January from 66.7% the month before.

Asset classes with the largest percentage of total balance at the end of January were target-date funds (28%), large U.S. equity funds (25%) and stable value funds (11%).

Asset classes with the most contributions in January were target-date funds (47%), large U.S. equity funds (19%) and international funds (8%).

U.S. bonds rose 1.1% in the month, large U.S. equities rose 8.0%, small U.S. equities gained 11.3%, and international equities were up 7.6%.

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Comparing Not-for-Profit and For-Profit Health Care DC Plan Data - Wed, 02/13/2019 - 18:48

In the health care industry, 403(b) plans still dominate the not-for-profit segment, according to the 2018 PLANSPONSOR Defined Contribution (DC) Survey.

In the not-for-profit health care segment, 67.3% of respondents offer 403(b) plans, while 47% offer a 401(k). In the for-profit segment, 96.1% offer a 401(k) and 2.6% offer a 403(b) plan. Brian O’Keefe, director of research and surveys at Strategic Insight, parent of PLANSPONSOR and PLANADVISER, explains that “for-profit” entities are often smaller, private practices, like physicians, dentists, MRI-centers, etc. while “not-for-profit” are often larger, state- nonprofit- or religious organization-sponsored hospitals.

In many ways, the survey shows not-for-profit health care DC plan sponsors have adopted more “best practices” for their plans. For example, 54.4% use automatic enrollment and 37.6% use automatic deferral escalation, either as an opt-out option or a voluntary option. Among for-profit health care DC plan sponsors, only 35.4% use auto enrollment and 31.2% use auto escalation. However, while 3% is the most common default deferral rate for auto enrollment for both segments, the for-profit segment is more likely to use a default rate higher than 3% (53.2% vs. 37.6% of not-for-profits).

Sixty-seven percent of not-for-profit health care organizations reported full-time employees are eligible to participate in their retirement plans immediately, while only 21.4% of for-profit plan health care DC plan sponsors offer immediate eligibility. In addition, 81.1% of the not-for-profit segment offers an employer match on employee deferrals, compared to 63.1% of the for-profit segment. However, for-profit health care DC plan sponsors are more likely to offer a non-elective or profit sharing contribution in their plans, 60.4% vs. 47.2%, respectively.

Asked how often they review their plan’s investment options 92.4% of not-for-profits indicated they do so annually or more often, and 84.5% of for-profits annually or more often. Among both health care segments, the most commonly reported average asset-weighted expense ratio of all investment options in their plan is less than 0.75%, or 75 basis points (bps) (84.6% not-for-profit, 74.6% for-profit).

More than half (53.4%) of not-for-profit health care DC plan sponsors said they externally benchmarked total fees paid to their DC provider/recordkeeper in past year, compared to 41.5% of for-profit plan sponsors. About two-thirds of both segments use the services of retirement plan advisers, but in the past year, 63.8% of the not-for-profit segment calculated actual fees paid to their adviser, compared to 51.2% of the for-profit segment.

Less than one-quarter (24.5%) of not-for-profit health care DC plan sponsor do not offer any retirement income products or services in- or out-of-plan to help participants with creating a retirement income stream. This is true for 56.8% of the for-profit segment.

Nearly 86% of not-for-profit health care entities reported that financial advice in some form is offered to DC plan participants, compared to 79.4% of for-profit entities. And, 44.9% of not-for-profits offer formal education/guidance on budgeting and 33.7% on credit/debt management, compared to 21.4% and 15.2% of for-profits, respectively. More than two-thirds (67.6%) of DC plan sponsors in the not-for-profit health care segment agreed with the statement that they have a responsibility to improve the financial wellness of employees, compared to 55.7% of for-profit plan sponsors that agreed.

Only 8.7% of for-profit health care DC plan sponsors measure the percent of participant who are meeting retirement income goals as a measure of success for their plans, and only 5.1% measure the percent of participants hitting their retirement income replacement goal. The numbers are 12.3% and 11.3%, respectively, among the not-for-profit segment.

Despite this, and despite the use by not-for-profit health care DC plan sponsors of many plan design and governance best practice, 22.4% of for-profit respondent agreed with the statement, “Most of our employees will achieve retirement income goals by age 65,” while on 15.9% of not-for-profit sponsors agreed.

For more information about PLANSPONSOR DC Survey industry reports, contact Brian O’Keefe at
(203) 979-3091 or

The post Comparing Not-for-Profit and For-Profit Health Care DC Plan Data appeared first on PLANSPONSOR.

Categories: Financial News

Parts of Schwab Self-Dealing ERISA Lawsuit Will Proceed - Wed, 02/13/2019 - 18:17

The U.S. District Court for the Northern district of California has issued a new ruling in an Employee Retirement Income Security Act (ERISA) self-dealing lawsuit filed against Schwab Retirement Plan Services and other Charles Schwab corporate entities.

The ruling comes after the Schwab defendants moved to dismiss in part the plaintiff’s second amended complaint. Defendants also filed a request for judicial notice in support of their motion. The plaintiff opposed the motion to dismiss but did not oppose the request for judicial notice. Having considered the arguments and evidence presented, the court has denied in part and granted in part the Schwab defendants’ motion to dismiss, without leave to amend. The court has also granted the defendants’ request for judicial notice.

The second amended complaint names three groups of defendants, including various parts of the larger Schwab organization, individual fiduciary defendants from the retirement plan committee, and the Schwab board of directors. The plaintiff was a participant in a Schwab employee retirement plan from 2009 to 2015. During his participation, according to case documents, the plaintiff invested in both affiliated and unaffiliated options.

Previously, in September 2018, the court granted in part and denied in part defendants’ first motion to dismiss, addressing the plaintiffs first amended complaint. At that stage, the court granted the plaintiff leave to amend counts I, III and IV, except as to elements relating to a self-directed brokerage fund, which the court dismissed without leave to amend. At that time, the court denied defendants’ motion to dismiss counts II and V.

The plaintiff subsequently filed a second amended complaint alleging the same five counts. That led the defendants to move to dismiss counts I, III and IV. The plaintiff’s second amended complaint included new allegations to support his breach of fiduciary duty claim (count I). Furthermore, he argues that his failure to monitor claim (count III) and breach of co-fiduciary duty claim (count IV) should survive court scrutiny to the extent count I survived.

In the new ruling, the court first turns to the Schwab defendants’ motion for judicial notice of 17 documents. The first 13 are documents consisting of the plan’s summary plan description, the plan’s 2016 Form 5500, various notices to plan participants regarding the plan’s investment options and a prospectus filed with the Securities Exchange Commission. As stated in the text of the ruling, defendants had requested the court take judicial notice of these documents in support of their first motion to dismiss. The court says they are judicially noticeable. The other four documents are excerpted reports specifying how various funds in the plan performed. The four reports contain figures which the plaintiff relied upon, although he did not cite them in his second amended complaint. Here, the court rules that these four reports are judicially noticeable for purposes of a Rule 12(b)(6) dismissal motion, “because the documents are incorporated by reference” into the second amended complaint.

Even with these documents admitted into the court’s consideration, the ruling sides in a few places with the plaintiffs.

“Plaintiff has pleaded sufficient facts to give rise to an inference of a breach of fiduciary duty,” the new ruling states. “Plaintiff argues that a deficient process can be inferred based on meeting minutes produced in discovery. Specifically, the second amended complaint alleges that meeting minutes show it had delegated its role in selecting a Schwab stable value fund replacement to an independent consultant, Mercer, because the plan committee had a conflict, and Mercer was to prepare a recommendation as to how the committee should proceed in replacing the terminated stable value fund. However, because no such report was produced in discovery, despite the production of other minutes and Mercer reports, and because defendants maintain that all non-privileged and responsive committee documents have been produced, the plaintiff argues the court should infer that no such report exists or that the committee ignored the recommendation from Mercer.”

The Schwab defendants here maintain that this Mercer report was not produced because it was outside the scope of claims the plaintiff could bring in arbitration in that he never invested in the Schwab stable value fund or Schwab money market fund. The court “does not find this persuasive” because defendants have produced thousands of pages of discovery materials.

“The court finds that, viewing the allegations in the light most favorable to plaintiff, the absence of such a Mercer report or meeting minutes showing Mercer’s recommendation gives rise to an inference that the committee either never received or disregarded Mercer’s recommendation,” the decision states. “This sufficiently alleges that fiduciary defendants breached their fiduciary duties because the committee failed to follow its own process to prudently and loyally investigate options before selecting alternatives for Schwab’s stable value fund.”

The decision then turns in favor of the defendants, ruling that the plaintiff’s other allegations as to a deficient process fail.

“To the extent plaintiff argues again that replacing Schwab’s stable value fund with another stable value fund, as opposed to the Schwab money market fund, would have been the prudent action, this fails as it did the first time because defendants are not required to provide a stable value fund,” the decision states. Plaintiff also argues that the committee’s process was deficient because it ignored years of data showing the SMRT Funds were underperforming. However, SMRT Funds were not part of the stable value fund replacement funds. Moreover, assuming this was to show the committee’s deficient selection process separate from the stable value fund replacements, this still fails. The only factual allegations to support this conclusion was the purported underperformance of the SMRT Funds themselves. Plaintiff cannot use the funds’ purported underperformance as factual support of a deficient process when the funds’ underperformance, as discussed later, is insufficient to infer imprudence and must be supported by facts alleging a deficient process.”

The plaintiff lastly argued that committee’s process was deficient because transferring the stable value fund to the unaffiliated replacements did not guarantee against a loss and the unaffiliated funds were not a comparable replacement as capital preservation options. However, the court has ruled, the plaintiff has pleaded no facts to support this conclusory allegation.

Ultimately, while the plaintiff’s other allegations as to a deficient process fail, because the lack of any Mercer report or minutes stating the independent consultant Mercer’s recommendation does give rise to an inference of imprudence and disloyalty in the committee’s process, the court denies defendants’ motion to dismiss count I to the extent it relies on this theory.

The ruling then goes on to explain that, apart from certain matters involving the Schwab money market fund and Schwab savings account, none of the plaintiff’s new allegations in the second amended complaint as to his affiliated funds theory sufficiently alleges facts to infer a breach of fiduciary defendants’ fiduciary duties pertaining to count I.

Reviewing all these matters together, the court concludes that the plaintiff has sufficiently alleged facts giving rise to an inference of imprudence and disloyalty as to his theory of defendants’ deficient process in selecting the Schwab stable value fund replacements based on the lack of a report or meeting minutes, along with the allegations of excessive fees and underperformance of these stable value fund replacements. Thus, to the extent plaintiff’s breach of fiduciary duty claim relies on these theories, the Court denies defendants’ motion to dismiss count I. However, because the plaintiff has failed to cure the deficiencies as to his other theories despite an opportunity to do so, the court grants defendants’ motion to dismiss count I as to the other theories, without leave to amend.

“Defendants’ motion is denied to the extent that counts I, III and IV are based on the theories of a deficient process in selecting a replacement for the stable value fund and of excessive fees and underperformance of such stable value fund replacements,” the decision states. “The motion is otherwise granted without leave to amend.”

The full text of the ruling is available here

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Categories: Financial News

Country Club to Pay $30K to Settle Age Discrimination Lawsuit - Wed, 02/13/2019 - 17:39

The Equal Employment Opportunity Commission (EEOC) announced that Llanerch Country Club of Havertown, Pennsylvania, has agreed to pay $30,000 in monetary relief and furnish significant equitable relief to settle an age discrimination lawsuit.

The EEOC says that in January 2013, the club began treating its oldest groundskeeper differently by laying him off for the winter season. Then, in December 2016, the club told the groundskeeper, who was then 59 years old, that he would be temporarily laid off. However, in the spring of 2017, the club told the workers that he would not be recalled or rehired, as the club was “looking to take the staff in a younger direction.”

Less than three weeks later, the club hired nine other groundskeepers who were significantly younger, the EEOC lawsuit charges.

In addition to paying $30,000 in monetary relief to the groundskeeper, the club is enjoined from engaging in age discrimination or retaliation. The club has agreed to train its managers on age discrimination, post a notice of employee rights under the Age Discrimination in Employment Act, which protects individuals age 40 and older from employment discrimination, and report any future complaints of age discrimination and retaliation to the EEOC.

“The contributions of workers age 40 and older and central to the vitality of our national economy and our local economy here in Eastern Pennsylvania,” said EEOC Regional Attorney Debra Lawrence of the agency’s Philadelphia District Office. “The Age Discrimination in Employment Act was designed to protect those workers’ rights and their vast contributions to the American workplace, and the EEOC will continue its efforts to safeguard those rights and contributions.”

EEOC Philadelphia District Director Jamie Williamson added: “We appreciate Llanerch Country Club working with us to resolve this case amicably and expeditiously.”

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Categories: Financial News

Survey Reveals How Employers Can Improve Wellbeing Program Outcomes - Tue, 02/12/2019 - 19:00

A survey shows that employers can improve the wellbeing experience of employees by taking a more personalized approach, which will engage employees and reduce medical costs.

Welltok surveyed more than 1,000 full-time workers ages 21 and older across the U.S in December with independent research firm Ipsos and found 56% of employees say the health and wellbeing programs offered by their employers are irrelevant, wasting company time and money. Delivering more personalized programming would motivate 82% of employees to participate more.

More than 80% of respondents believe everyone at their company is offered the same resources, regardless of individual needs and goals. “To be truly effective, employers need to gain deeper insights about their employees as individuals by leveraging consumer data. Consumer data can provide valuable insights into a person’s social determinants of health (where a person lives or works, their education level, household composition, etc.), which largely contribute to their overall health status. Leveraging all types of data (healthcare and non-healthcare) and applying advanced analytics and machine learning better predicts who will be most receptive to what programs, and ultimately, how best to drive targeted actions. Over time, advanced analytics also provides insights about which programs are working (or not working), enabling companies to optimize their program offerings,” says Welltok’s “Wellbeing Wake Up Report: What Employees Want.”

The survey found employees are interested in many types of incentives—extra vacation time (74%), flexible work schedule (62%), and wellness benefits (55%) are the most popular non-traditional choices.

Nearly six in 10 (58%) full-time working Americans feel that their direct manager supports their efforts to improve or maintain their wellbeing (e.g., time off for a doctor’s appointment, encourage lunchtime yoga), yet company-wide initiatives seem to be falling short. In most cases, people can’t find their company’s wellbeing resources, with only 16% strongly agreeing that they know where to find all the health and wellbeing resources available to them.

As consumerism continues to make its way into health care, employees also want multiple ways to access resources, when and where they need them. Nearly 70% of respondents have to some degree increased their use of technology over the past couple of years to manage or support their health (internet resources, mobile applications, monitoring/tracking devices, etc.). Welltok says using technology, like mobile apps, artificial intelligence (AI)-powered chatbots, or text messaging can make it easy for employers to meet these consumer demands at scale, without breaking the bank.

More than 60% of workers feel it is important for companies to offer health and wellbeing resources that support total wellbeing, which not only includes physical health but also financial, emotional and social health. When ranking health and wellbeing priorities, financial stability was No. 1.

To download the full report, visit

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Categories: Financial News

Health Shocks Drive Many to Retire Earlier Than Planned - Tue, 02/12/2019 - 18:12

The Center for Retirement Research at Boston College (CRR) has published a new report looking into what issues commonly hold workers back from staying in the labor force beyond the age of 65.

The research brief’s authors are Alicia H. Munnell, director of the Center for Retirement Research at Boston College (CRR) and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management; Matthew S. Rutledge, associate professor of the practice of economics at Boston College and a research fellow at the CRR; and Geoffrey T. Sanzenbacher, associate director of research at the CRR.

According to the CRR research trio, several studies have found that a deterioration in health precipitates early retirement. Other influences on early retirement include changes in marital status and the presence of employer buyout offers, they write.

“But no study to date has examined all of the factors together, making it difficult to say which one matters the most,” the brief says.

Citing data from the longitudinal Health and Retirement Study, the CRR researchers say about 37% of people retire earlier than planned. They go on to explain how people’s planned retirement ages cluster around 62, which is Social Security’s earliest eligibility age, and 65, which is Medicare’s eligibility age. Notably, the later someone plans to retire, the less likely they are to achieve their goal, according to the report.

“For example, of the 21% of people who intended to work to age 66 or later, more than half failed to reach this target,” the report says.

According to the CRR researchers, the causes or “shocks” driving earlier-than-hoped retirements can be lumped into four categories. These are health shocks, employment shocks, familial shocks and financial shocks.

“In determining which shocks matter most [from a policy perspective], two factors are important,” the report says. “First, how big is the impact of the shock on people who experience it? Second, how many people actually experience it? … To determine a shock’s impact, a regression analysis relates the occurrence of a shock to the probability of retiring early. This regression controls for other personal characteristics that might be correlated with both earlier-than-planned retirement and the occurrence of shocks.”

According to the researchers, the regression results indicate that several shocks have a statistically significant effect on retiring early. For example, health shocks matter quite a bit. Each health condition a respondent has at the time they report a planned retirement age is associated with a 3.3-percentage-point increase in early retirement, “as people seem to be surprised by how fast their ability to work deteriorates.”

On the other hand, being willing to switch jobs voluntarily is related to a 6.8-percentage-point decrease in the probability of retiring early, the report says. “The effect of a job loss is very dependent on the worker’s ability to find a new job—If they find one, they are 6.6 percentage points less likely to retire early, but if they do not find one they are 27.6 percentage points more likely to retire early. On the family side, having a spouse retire increases the probability of retiring early, and having a parent move in has a strong impact in the same direction. Financial shocks do not seem to play a significant role.”

In terms of what shocks happen most frequently, the report says the main takeaway is that changes in health are common, as are spousal retirements, marital status changes, and large swings in wealth, “which is largely because people have little wealth to begin with.”

The CRR researchers conclude that health likely plays the largest role in early retirement, both because people in bad initial health overestimate how long they can work and because health often worsens before the age at which they planned to retire. Job loss is also important, the report says, although the effect is mitigated by the fact that some people are able to find a new job and those people are more likely to make it to their planned age.

“Still, for those who fail to find a new job, the effect seems to be discouragement and ultimately an early retirement,” the report concludes. “With respect to family transitions, having a parent move in seems to be a large burden on people who experience it, but it is not a frequent enough occurrence to drive early retirement in the population. Finally, even though financial shocks appear somewhat common, they tend to have a small and not statistically significant effect on driving early retirement. Of course, more research in this area is needed, since the factors considered in this paper explain only about a quarter of early retirements.”

The full report can be downloaded here.

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Categories: Financial News

Hearing Witnesses Offered Recommendations to Promote Retirement Savings - Tue, 02/12/2019 - 17:42

The Senate Special Committee on Aging held a hearing about “Financial Security in Retirement: Innovations and Best Practices to Promote Savings.”

In his testimony, Gene L. Dodaro, Comptroller General of the United States and head of the Government Accountability Office (GAO), talked about the three pillars of the U.S. retirement system—Social Security, employer-sponsored plans, and individuals’ savings—and how they each face various risks and challenges.

Dodaro offered data to show how important Social Security is to many Americans, especially lower-income Americans. “Our analysis of data from the Federal Reserve Board’s most recent Survey of Consumer Finances (SCF) showed that in 2016, among households age 65 and over, the bottom 20%, ranked by income, relied on Social Security retirement benefits for 81% of their income, on average.  But Social Security is facing financial difficulties that, if not addressed, will affect its long-term stability,” he said. The Social Security Board of Trustees 2018 report said current projections indicate that by 2034, the retirement program trust fund will only be sufficient to pay 77% of scheduled benefits.

According to Dodaro, the GAO designated the Pension Benefit Guaranty Corporation’s (PBGC)’S single-employer program as high risk in July 2003 and added the multi-employer program to its high-risk list in January 2009. “As long as PBGC’s long-term financial stability remains uncertain, the retirement benefits of millions of U.S. workers and retirees are at risk of greater reductions should their benefit plans be terminated below PBGC’s current guaranteed benefit levels,” he said.

Dodaro blamed the PBGC’s precarious situation on a couple of things. For one, as more employers have abandoned defined benefit (DB) plans, since 1985, there has been a 78% decline in the number of plans insured by PBGC and more than 13 million fewer workers actively participating in PBGC-insured plans. He also blamed the PBGC’s financial woes on the trend of single-employer plan sponsors transferring the liability for some of their participants to insurance companies via group annuity “buy-outs,” further reducing the number of participants in PBGC-covered plans. “As a result of these trends, even though PBGC premium rates have increased significantly in recent years, PBGC’s premium base has been eroding over time as fewer sponsors are paying premiums for fewer participants,” he noted.

He also pointed out that although individuals without access to a defined contribution (DC) employer-sponsored plan can save for retirement on their own, having access to an employer-sponsored retirement plan makes it easier to save, and more likely that an individual will have another source of income in retirement beyond Social Security. The GAO’s prior work found that employees working for smaller firms and in certain industries, such as leisure and hospitality, are significantly less likely to have access to an employer-sponsored plan compared with those working in larger firms and in certain other industries, such as information services. Also, it found that low-income workers are much less likely than high-income workers to have access to an employer-sponsored plan. Dodaro added that findings from the most recent SCF indicate that an individual’s ability to accumulate retirement savings depends on the individual’s income level. In addition, the disparities in average account balances by income level have increased markedly over time.

He touted automatic enrollment and auto portability as ways DC plan enrollment and contribution levels can be encouraged. He also suggested that offering systematic withdrawals or lifetime income options to DC plans can help DC plan participants manage retirement income.

As for personal savings, Dodaro noted that over the past several decades, the personal saving rate—which is calculated as the proportion of disposable income that households save—has trended steeply downward, from a high of 14.2% in 1975, to a low of 3.1% in 2005, before recovering somewhat to 6.8% in 2018. “The decline in the U.S. personal savings rate over time is concerning and could have implications for retirement security, particularly when coupled with the recent trend of low wage growth. After accounting for inflation, average wages remain near the levels they were in the 1970s for most individuals, adding to the difficulty of increasing their level of saving,” he said.

Dodaro contended that retirement issues have been addressed with an incremental approach. He pointed out that at least 25 laws pertaining to retirement have been enacted since the Employee Retirement Income Security Act (ERISA)—a couple that made large changes to the retirement system, but many that were targeted to just a couple or few issues. In addition, the number of agencies that play roles in the current retirement system has contributed to the incremental approach to addressing concerns, with no single federal agency being responsible for taking a broad view of the system as a whole. Having multiple agencies involved in the system has also contributed to a complex web of programs and requirements, he said.

Dodaro testified that a panel of 15 retirement experts convened by the GAO in November 2016 agreed that there is a need for a new comprehensive evaluation of the U.S. retirement system. In its 2017 report, it suggested five policy goals for a reformed U.S. retirement system as a starting point for discussion: promoting universal access to a retirement savings vehicle, ensuring greater retirement income adequacy, improving options for the spend down phase of retirement, reducing complexity and risk for both participants and plan sponsors, and stabilizing fiscal exposure to the federal government.

The GAO recommended that Congress consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve the nation’s approach to promoting more stable retirement security. It suggested that such a commission include representatives from government agencies, employers, the financial services industry, unions, participant advocates, and researchers, among others, to help inform policymakers on changes needed to improve the current U.S. retirement system.

In his testimony, John Scott, director of the retirement savings project at The Pew Charitable Trusts, commended the 2017 GAO report that calls for a comprehensive examination of the retirement system.

But, he also said many small business owners are not familiar with current plan options that are designed for small firms. In addition, the perceived high cost of starting a plan is deterring small employers from offering retirement benefits. “Policy initiatives that reduce plan startup costs and improve awareness of SIMPLE and SEP plans could be useful in encouraging new plans,” he suggested. 

Scott also pointed to Pew research that found executives of small to mid-size businesses saw benefits to the idea of a multiple employer plan (MEP), which allows employers to combine to offer a single plan that achieves economies of scale and lower costs. The survey found that 85% of employers said they would find an MEP somewhat or very helpful. Most businesses without a plan strongly or somewhat supported each of the individual elements of the MEP. Sixty-one percent of employers without plans said they would definitely be or might be interested in participating in such a program.

Denis St. Peter, president and CEO of CES, Inc., first shared with the committee how his company used the addition of a matching contribution and aggressive education and one-on-one employee meetings with advisers to improve its 401(k) plan from a 62.3% participation rate and 3.9% average deferral rate in 2010 to an 89.5% participation rate and 13.9% average deferral rate in 2018.

Recommendations he made for changes to the tax rules governing DC plans to facilitate greater employee retirement savings included:

  • Increase the annual deferral limits and catch up contribution to promote and incentivize more retirement savings;
  • Eliminate the required minimum distribution (RMD) starting at age 70 ½;
  • Changing nondiscrimination rules so that those employees who are in a position to save for retirement are not as limited by the savings rates of those employees who are less able to save for retirement;
  • Incentivize very small employers (1-25 employees) to create and maintain retirement programs by increasing contribution limits (including catch-up contributions) under SIMPLE plans; and
  • Allow higher contribution limits under SIMPLE programs for other small employers (26-100 employees).

The testimony of Linda K. Stone, fellow volunteer at the Women’s Institute for a Secure Retirement, focused primarily on the unique challenges that women face in trying to achieve retirement financial security.

She pointed out that women face greater longevity risk than men due to their longer lives and the resulting need for more income. However, she said having more income during retirement starts with earnings during working years and access to employer-sponsored retirement plans, and generally, women of all races and ethnicities earn less than men throughout their lifetimes, and in addition, caregiving responsibilities for children and/or parents as well as spouses causes women to spend years out of the job market or to work part-time without access to benefits. Stone added that Social Security reports that, on average, women have nine years with zero earnings, and women’s careers average 29 years compared to 39 years for men. The zero earnings are compounded in the calculation of their Social Security benefit.

“The reality of today’s retirement landscape is do-it-yourself, and do it right, or live at or below the edge of poverty in what are supposed to be your golden years,” Stone said. “The nature of today’s system of individual responsibility demands financial capability.” She pointed out that women as well as men tend to lack basic financial knowledge, which is often the reason for making serious financial mistakes. Both women and men need the best information and opportunity to access information to ensure that they do not make costly decisions. “This information should be targeted to women as spouses and caregivers, as well as to women as employees,” she suggested.

Stone told the committee there is a need for more basic resources to help people figure out how much they need to increase their savings by in order to retire with security. She offered a list of several issues that women are in particular need of learning about or better understanding:

  • The impact of future inflation and taxes is often not included in planning for retirement despite the significant impact it can have on retirement income;
  • Asset to income ratios are often not well understood and individuals are often confused about how much is needed for a secure retirement;
  • Many individuals struggle to plan how they will draw down assets and need greater access to flexible income distribution options and guaranteed lifetime income options; and
  • Longevity risk is poorly understood and not widely planned for.
A replay of the hearing and text of witness testimony may be found here.

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Categories: Financial News

EBRI Reassesses Whether DC or DB Plans Are Better for Participants - Mon, 02/11/2019 - 20:16

The Employee Benefit Research Institute (EBRI) has published a new in-depth analysis comparing the benefits generated by defined benefit (DB) plans compared with automatic enrollment defined contribution (DC) plans.

Previous EBRI research reported on a comparative analysis of future benefits from private-sector, voluntary enrollment 401(k) plans and stylized, final-average-pay defined benefit plans. According to EBRI, the new report expands on the previous research by computing the actual final-average DB accrual that would be required to provide an equal amount of retirement income at age 65 as would be produced by the annuitized value of the projected sum of the 401(k) and IRA rollover balances under automatic enrollment 401(k) plans.

Assuming historical rates of return as well as annuity purchase prices reflecting average bond rates over the period from 1986 to 2013, the analysis shows that, for males, defined benefit “break-even” rates are “rarely less than 1.5% of final pay.” In fact, EBRI says that in only two of the 16 combinations of wage quartiles and years of plan eligibility analyzed for males are defined benefit break-even rates less than 1.5% of final pay per years of service.

For women, five of the 16 combinations have “break-even” rates less than 1.5%, EBRI reports. Furthermore, when these findings are subjected to the scrutiny of various “stress tests” both by reducing the rate of return assumptions by 200 basis points as well as utilizing current annuity purchase prices, results show that in many cases the automatic enrollment 401(k) plans lose their comparative advantage to the stylized, final-average DB plans, especially for lower-paid employees as demonstrated by the lower break-even accrual rates.

Additional DB vs. DC Insights

According to EBRI, given their “higher conditional probabilities” of participation in an automatic enrollment 401(k) plan when eligible, as well as lower opt-out rates after the initial year, one might expect that higher-income employees would need a higher DB accrual rate to produce an equivalent level of retirement income as the 401(k) plan. This is indeed what is generally observed, EBRI says.

“For all years-of-eligibility categories, the larger income quartiles have higher break-even accrual rates,” the report says. “For example, for those in the lowest income quartile, the median DB accrual rate that males with 31 to 40 years of plan eligibility would need in order to generate the same retirement income that they are projected to have with a 401(k) is 2.4% of final compensation. This increases to 2.5% for the next income quartile and 2.7% for the third income quartile. Those in the highest income quartile would need a 3.1% accrual rate for equivalency.”

Given their longer life expectancies at age 65 (and hence higher annuity purchase prices in the individual market), EBRI says females would be expected to need lower DB accrual rates for equivalency.

“And, in fact, comparing figures 1A and 1B shows that for all 16 combinations of years-of-eligibility categories and income quartiles, the median DB accrual rate for females is less than, or equal to, the corresponding rate for males,” the report says. “Figures 2A and 2B show the impact on the DB accrual rates needed for equivalency for males and females, respectively, of reducing the assumed rates of return for the first ten years from historical norms to conform to consultant expectations. Because the lower rates of return in the short term would reduce the expected account balances, the DB plan would require a lower accrual rate to provide an equivalent benefit.”

As an example, the report points to the lowest income quartile, where the median DB accrual that males with 31 to 40 years of plan eligibility in their careers would need in order to have the same retirement income that they are projected to have with a 401(k) plan is 2.2% of final compensation.

“This is an 8% reduction compared with the 2.4% value under the baseline return assumptions in Figure 1A,” the report says. “Figures 3A and 3B show a similar impact of reducing the assumed rates of return; however, this time it is assumed to be a permanent reduction of 200 basis points. For example, for the lowest income quartile, the median DB accrual that males (Figure 3A) with 31 to 40 years of plan eligibility in their careers would need in order to have the same retirement income that they are projected to have with a 401(k) plan is 1.6% of final compensation. This is a 33% reduction compared with the 2.4% value under the baseline return assumptions in Figure 1A.”

EBRI Weighs Impact of Auto-Portability

In June 2018, EBRI issued a report saying that if the Automatic Retirement Plan Act were passed, it would reduce the $4.13 trillion retirement savings shortfall for U.S. households headed by those between the ages of 35 and 63 by $645 billion, or 15.6%.

The newly published EBRI report also considers this topic, finding that, as expected, the impact of auto-portability would be greatest among the lowest income quartile, given their lower account balances and the negative correlation between account balances and cash-out activity.

“For example, for those in the lowest income quartile, the median DB accrual that males with 21 to 30 years of plan eligibility would need in order to have the same retirement income that they are projected to have with a 401(k) plan is 2.3% of final compensation,” the report says. “This represents a 28% increase from the 1.8% value under the baseline assumptions. The results are even more dramatic for males in the lowest income quartile with only 11 to 20 years of plan eligibility. In this case, the 3.1% median accrual rate needed for equivalency is 82% greater than the 1.7% value in Figure 1A.”

Assuming the auto portability scenario for 401(k) plans, EBRI says the results for those with only one to 10 years of eligibility are at least 6.2% for all income quartiles for males and at least 5.9% for females.

“This reflects the larger propensity for those who end up in this category to have shorter tenure positions and hence lower account balances at job change,” EBRI says.

The full EBRI report can be downloaded here.

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Categories: Financial News

DB Plan Funded Status Rebounds in January - Mon, 02/11/2019 - 20:05

After December wiped out all funded status gains for defined benefit (DB) plans last year, firms that track funded status estimate 2% to 3% improvement for the first month of 2019.

The estimated aggregate funding level of pension plans sponsored by Standard & Poor’s (S&P) 1500 companies increased by 3% last month to 88%, as a result of an increase in U.S. equity markets, according to Mercer. As of January 31, the estimated aggregate deficit of $262 billion decreased by $50 billion as compared with $312 billion measured at the end of December.

The S&P 500 index increased 7.87%, and the MSCI EAFE index increased 6.47% in January. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 15 basis points (bps) to 4.04%.

“Even though January was a solid improvement in equities, there is still much uncertainty in the market as evidenced by persisting volatility. We expect plan sponsors will continue to keep a close eye on markets and look for opportunities to lock in gains as opportunities arise,” says Matt McDaniel, a partner in Mercer’s U.S. wealth business.

According to Wilshire Associates, the aggregate funded ratio for U.S. corporate pension plans increased by 2.8 percentage points to end January at 87.3%. The monthly change in funding resulted from a 5.5% increase in asset values partially offset by a 2.2% increase in liability values. The aggregate funded ratio was down 1.6 percentage points over the trailing 12 months. The aggregate figures represent an estimate of the combined assets and liabilities of corporate pension plans sponsored by S&P 500 companies with a duration in line with the FTSE Pension Liability Index – Intermediate.

“January’s bounce back in funded ratios was propelled by the best monthly percentage increase for the Wilshire 5000 in more than seven years,” says Ned McGuire, managing director and a member of the pension risk solutions group of Wilshire Consulting. “January’s 2.8 percentage point increase in funding was the largest monthly increase over the past 12 months and follows December’s 6 percentage point decline.”

The aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 84.9% to 86.5% last month, according to the Aon Pension Risk Tracker. The funded status deficit decreased by $27 billion, which was driven by an asset increase of $66 billion, offset by liability increases of $39 billion year-to-date.

Pension asset returns experienced steady growth during January, ending the month with a 4.3% return.

According to Aon, the month-end 10-year Treasury rate decreased by 6 bps relative to the December month-end rate, and credit spreads narrowed by 11 bps. This combination resulted in a decrease, from 3.96% to 3.79%, in the interest rates used to value pension liabilities. Given that a majority of the plans in the U.S. are still exposed to interest rate risk, the increase in pension liability caused by decreasing interest rates slightly counteracted the positive effects from asset returns on the funded status of these plans.

Northern Trust Asset Management (NTAM) also found that corporate pension plans’ average funded ratio improved, from 83.8% to 85.9%, last month. The increase was primarily driven by a sharp rise in assets that was partially offset by a decrease in discount rates. Global equity markets were up approximately 8% during the month. The average discount rate decreased from 3.91% to 3.75%. 

Legal & General Investment Management America (LGIMA) estimates the average defined benefit plan’s funding ratio increased 2.1% to 86.5% in January. Speaking of the improved market returns, a representative for LGIMA says, “A change in the Fed’s tone has certainly contributed to the recovery—the comments on flexibility regarding rate and balance-sheet-size decisions have contributed to a general sense that, despite its claims to the contrary, the Fed is increasingly dovish and attuned to risk markets. But beyond this, it is hard to pinpoint any other specific catalysts for the rebound.”

Both model plans that October Three tracks improved last month: Plan A gained almost 3%, while Plan B gained about 1%. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation, the emphasis being greater on corporate and long-duration bonds.

According to October Three, January was a very good month for stocks, and bonds gained ground as well, driven by lower interest rates. Overall, the firm’s traditional 60/40 gained 5% to 6%, while the conservative 20/80 portfolio grew about 3%. Corporate bond yields fell 0.15%, pushing pension liabilities up 2% to 3%.

Looking ahead, Brian Donohue, a partner at October Three, says, “Pension funding relief has reduced required plan funding since 2012, but relief is expected to gradually sunset over the next three to four years, increasing funding requirements for pension sponsors that have made only required contributions. Discount rates moved down last month. We expect most pension sponsors will use effective discount rates in the 3.9% to 4.3% range to measure pension liabilities right now.”

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Categories: Financial News

SURVEY SAYS: Valentine’s Day Celebrations - Mon, 02/11/2019 - 10:30

Last week, I asked NewsDash readers, “Do you plan to celebrate Valentine’s Day this year, and what will that involve?”


Nearly half (48.5%) of responding readers do plan to celebrate Valentine’s Day this year, while 42.4% do not and 9.1% are unsure.


Asked with whom they will celebrate Valentine’s Day (they could choose all that apply), 69.7% said their spouse or partner, and 3% said boyfriend or girlfriend. Nearly two in ten (18.2%) said they would celebrate with their children, and another 18.2% said no one.


Half of respondents reported they will give their Valentine a card, and 31.2% will go to dinner. Another 31.2% said they will give no gifts for Valentine’s Day. Candy will be given by 12.5% of responding readers, jewelry will be given by 9.4%, and stuffed animal and movie were selected by 3.1% of readers each. “Other” responses included:


  • I usually bake his favorite cookies and we go to dinner at some point during the weekend (not specifically on VD)
  • Maybe some little silly thing
  • Small toys for each kid, like Hot Wheels cars
  • Chocolate dipped strawberries delivered to her office.
  • Me
  • A book for my daughter
  • A date to the ballet


In verbatim comments, several responding readers did say Valentine’s Day is a Hallmark holiday that need not be celebrated. A few shared Valentine’s Day traditions, and a few talked about showing love every day of the year. Since Valentine’s Day is my birthday, Editor’s Choice has to go to the reader who left the comment that I often say to people myself, “Valentine’s Day? What is this Valentine’s Day of which you speak?”


Thanks to all who participated in the survey, and a big thank you to the readers who told me the problem that was keeping people from leaving responses! Sorry to those who were unable to.



One of the many joys of being single is freedom from the stress of Valentine’s Day.

I’ve always loved Valentine’s Day! Love, hearts, flowers, candy…my kids and grands have always loved it, too.

It’s a Hallmark Holiday. We celebrate our love every day – really!

Valentine’s Day? What is this Valentine’s Day of which you speak?

Valentine’s Day is more for Hallmark and flower shops. I like getting flowers once in a while, but would rather get them on any other day than VD, because the cost is so inflated. One time my husband and I were shopping together and both needed to pick out VD cards. We laughed at the irony so we each picked one out, showed it to the other in the store, put them back and called it good! We still laugh at this!

We don’t do much for Valentine’s Day since our anniversary is Feb 21. We will be celebrating 37 years this year and that is something worth celebrating for sure!

I call it a “Hallmark Day”. Yes there is a history of St. Valentine but Hallmark really made it what it is. My husband and I keep it fun. We pick an amount – this year it was $16.73. You cannot spend more than that amount on the other person including the card, any wrapping paper/bag, everything. Really makes Valentine’s Day special because you really have to think about it. We just make up an amount. It becomes a game.

My husband and I do not celebrate this Hallmark holiday but the kids think it is very fun. They enjoy receiving a few candy treats and some small toys.

Valentines is a Hallmark Holiday. No need to celebrate this holiday if you treat your loved ones with love and respect every day. I always love to see the ladies bragging about the nice gifts their husband gave them on Valentine’s Day. These same ladies complain how awful their husbands are for the other 364 days for the year.

Home cooked dinner and just two of us

Any day that celebrates love, kindness and giving is a day worth celebrating!

Valentine’s Day is a great opportunity to express love and warmth to family, friends and even co-workers; it doesn’t have to be only about romantic love. What could be better than a day of celebrating love?

Would be nice to have someone to celebrate it with this year…

Valentine’s Day is a fantastic holiday when you’re young, giving you the opportunity to show your loved ones just how you love them. As you grow older, that continues for some marriages and relationships but becomes a pointed reminder of what has been lost over the years.

Oh crap, Valentine’s Day! I almost forgot…Thanks for the reminder!

My husband views it as a Hallmark holiday. He says he doesn’t need to be told when to treat me to something special—he does it all through the year. And he’s right!

Nothing significant happened in our lives on February 14, so my wife and I treat it like any other day. We do celebrate our “half anniversary”, which is two weeks later. That seems to be more meaningful.

Those who make too much of a fuss about Valentine’s Day—and I say the same thing about weddings—seem not to realize that the way to keep a relationship strong is to be steady, reliable, and supportive every day. (Having said that, I make sure there’s a card and a small gift for my wife every year!)

In addition to enjoying a dinner with the family that is still at home on the 14th, planning to drive 9 hours round trip to deliver Valentine’s gift to a homesick child. Need to seize the moment when it still matters.

My spouse is not just any spouse, but my best friend and confidante. For me, every day is Valentine’s Day.

It may be another “Hallmark Holiday” to some, but sometimes it’s nice to have a reason to celebrate one another in whatever relationship you are in (even yourself)…we sometimes forget to love each other or ourselves, so a holiday to celebrate just that….I can get behind!

I have been married for 15 years and we usually celebrate with a peck on the cheek. This year, my company is treating us to the ballet! So much romance!

My day will be spent with the newest love of my life…my first grandson! Nothing could be more special!



NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Strategic Insight or its affiliates.

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Categories: Financial News
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