The Markets February 5, 2016

TDFs Post First Annual Loss Since 2008

Positive fourth-quarter performance was not enough to pull target-date funds out of negative territory, according to Callan Target Date Index.
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The Callan Target Date Index posted a 2015 return of -0.86%, its first annual loss since 2008, the investment consultant reported.

The downturn came as several large target-date fund (TDF) managers reported increasing their glide path allocation to equities over the past several years, says Lori Lucas, head of Callan’s defined contribution practice. “After the carnage of 2008, when the median target-date fund lost 26.41%, target-date fund managers generally decreased their glide path allocations to equities and improved their overall diversification,” she notes.

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However, the range of target-date fund performance last year was considerably narrower when compared with 2008. That year the range between best- and worst-performing target date funds (as measured by the 10th and 90th percentiles) was more than 22 percentage points. In 2015, the best and worst performers differed by fewer than 2 percentage points.

Target-date funds did rebound nicely in the final quarter of 2015, returning 3.01% as measured by the Callan Target Date Index. The funds benefited primarily from domestic equity exposure during the quarter, with the Standard & Poor’s (S&P) 500 gaining 7.04%. Though the domestic stock market enjoyed strong performance, bonds declined -0.57% as measured by the Barclays U.S. Aggregate Index.

The Callan Target Date Index is an equally weighted composite of 44 target-date fund series, including both mutual funds and collective trusts. It is updated quarterly. The index allows plan sponsors, managers and participants to track the performance and asset allocation of available target-date mutual funds and collective trusts.

More information is at Callan’s Target Date Index website.

The Markets February 5, 2016

The Market Did a Number on DB Plans in January

A negative number, that is.
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Investors saw a market in January that was more volatile than in recent times, and according to analysts, this was a detriment to defined benefit pension plans.

“In just one month of 2016, we have seen the entire improvement in funded status for 2015 disappear,” says Jim Ritchie, a principal in Mercer’s Retirement Business.

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Mercer estimates the aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by 3% to 79% as of January 31, as a result of negative equity markets and a decrease in rates. As of January 31, the estimated aggregate deficit of $472 billion increased by $68 billion as compared to the $404 billion deficit measured at the end of 2015.

Meanwhile, Wilshire Consulting reported that the aggregate funded ratio for U.S. corporate pension plans decreased by 3.7% to 78.9% for the month of January 2016. January’s 3.7% deterioration in funding levels was the largest monthly drop since a 4.7% decline in January 2015, according to the firm.

Ned McGuire, vice president and member of the Pension Risk Solutions Group of Wilshire Consulting, says, the decline in funding levels was driven by a 2.8% decrease in asset value and a 1.8% increase in liability value. “The asset result is due to negative returns for public equity, and the liability result is due to declining corporate bond yields used to value pension liabilities,” he explains.

Mercer notes that the S&P 500 index dropped 5.1% and the MSCI EAFE index dropped 7.3% in January. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased to 4.13%.

“While many plan sponsors have taken steps to de-risk their pension plans, 2016 will be a test on how much risk pension plans still retain,” Ritchie says. “We recommend that plan sponsors have a sense of urgency to stress test their pension plans against equity losses and adjust their asset allocation strategy accordingly. While many believe interest rates will rise and help improve the funded status of pension plans, the recent action by the Federal Reserve was arguably already priced into long term rates and has in fact not prevented further reduction in yields, as investors make a flight to long term fixed income.” 

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