Advisers Have Opportunity in Health Care Market

Defined benefit (DB) plans are prevalent in the health care market, offering opportunities for advisers to help with plan sponsors' concerns.

Overall, 42% of health care plan sponsors offer DB plans, and they are more common among sponsors of 403(b) plans (48%), according to the 10th annual survey of health care plan sponsors by Diversified and the American Hospital Association (AHA). Plan sponsors in the health care sector are concerned about the impact of defined benefit plans on company finances, as well as the long-term commitment to the plan, Brodie Wood, vice president and not-for-profit leader at Diversified Investment Advisors, said during a webinar about the research.

Plan sponsors in this industry anticipate they will be hiring consultants and/or freezing their DB plans in the future, making it a great place for advisers to market their services. Advisers consulting on defined contribution (DC) plans should also think about services they can offer defined benefit plans, Wood said, especially at a time when so many DB plans are being frozen. Fifty-one percent of survey respondents said their plans are frozen to new employees, and 49% said their plans are frozen to all employees.

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The percentage of health care plan sponsors that said they use an adviser jumped from 79% in 2011 to 85% in 2012. According to plan sponsors, the top responsibilities of their advisers are “ongoing investment monitoring” (74%), “investment selection” (70%) and “development of investments policy statement” (54%). Only 42% said their adviser’s responsibilities included “act as the plan fiduciary,” but Wood said this may increase as the adviser’s role becomes more crucial (see “Health Care Employers Embracing 403(b) Enhancements”).

The role of the adviser will likely grow by more than 50% over the next three years, he added.

As advisers consider working in the health care space, they should keep in mind that many things they learned in the corporate market can also apply in the health care and nonprofit space. However, Wood added, “The health care space is quite unique.”

A total of 180 health care plan sponsors nationwide responded to the survey conducted during the second quarter of 2012. To request a copy of the survey report, send an email to RetirementResearchCouncil@divinvest.com.

4% Spending Rule Still Feasible

A 4% spending goal may still be a reasonable starting point for investors who follow a total-return spending approach, a research paper concludes.

Vanguard’s “Revisiting the ‘4% Spending Rule’” explains that a total-return spending approach is an approach in which investors remain properly balanced between stocks and bonds, and diversified within asset classes, so that their portfolios can potentially benefit from both dividends and capital appreciation. As an example the paper states, instead of attempting to alter their portfolios by overweighting bonds, increasing bond duration, or overweighting income-yielding stocks, investors using the total-return approach allow for spending both from portfolio cash flows and from the potential increase in their portfolios’ value. 

According to the report, the current low-yield environment that retirees are facing is much different from the investment climate of 30 years ago, which has important implications for the amount that a retiree can safely expect to spend annually from a portfolio without jeopardizing its durability.    

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Vanguard believes it is important for investors to consider real-return expectations when constructing portfolios, because today’s low stock dividend yields and U.S. Treasury bond yields are, in part, associated with lower expected inflation today than 20 or 30 years ago. Specifically, Vanguard’s market and economic outlook indicates that the average annualized returns on a balanced 50% equity/50% bond portfolio for the decade ending 2021 are expected to center in the 3% to 4.5% real-return range.

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Although this level is moderately below the actual average real return of 5% for the same portfolio since 1926, it potentially offers support for the continued feasibility of a 4% inflation-adjusted withdrawal program as a starting point for balanced investors, the researchers contend.  

Keeping in mind the relationships among key variables such as time horizon, asset allocation and portfolio success rates, an investor can develop a customized spending rate that provides the highest probability of meeting his or her long-term goals. The analyses in the paper illustrate sustainable withdrawal rates can range from 3% of a portfolio (for conservative investors with long time horizons) to more than 9% (for more aggressive investors with shorter time horizons)—all with a high probability of not depleting assets during the specified time horizons.   

The researchers note that each investor’s situation includes unique circumstances that can affect portfolio spending and sustainability.  

The report can be downloaded here.

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