The Markets March 26, 2018

Pre-Retirees, Retirees Not Addressing Market Volatility in Portfolios

“It’s clear from our research that many retirees may be vulnerable to sudden market corrections and volatility, which can adversely impact savings,” Tina Wilson, head of Investment Solutions Innovation at MassMutual.

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Retirees and pre-retirees overwhelmingly express concerns about protecting retirement savings from stock market losses, yet many say their primary investment goal is to grow rather than to preserve assets, according to a new study from Massachusetts Mutual Life Insurance Co.

The MassMutual Retirement Savings Risk Study found 94% of pre-retirees and 92% of retirees “strongly agree” or “somewhat agree” that it is important to take steps to avoid major stock market losses right before retirement. One in two pre-retirees (49%) and one in three retirees (32%) are apprehensive about taking too much investment risk, the study finds.

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However, the study finds that many retirees and pre-retirees are more focused on growing rather than preserving their assets:

  • 59% of pre-retirees and 32% of retirees describe their primary investment strategy as focused on either “aggressive growth” or “moderate growth;”
  • 32% of pre-retirees and 49% of retirees characterize their investment mix as a balance between growing and preserving their savings;
  • Pre-retirees are most likely to predict that their investments will be focused primarily on preservation rather than growth when they retire, while retirees are less likely to actually adopt that strategy; and
  • Guaranteed income either through a pension or annuity makes a difference. Although they report similar risk tolerances, study respondents with a source of guaranteed income were more likely to focus on growing their assets just before and into retirement than those without guaranteed income.

Few retirees surveyed wish they had been more conservative just before retirement, noted Tina Wilson, head of investment solutions innovation, a sentiment that may have been colored by one of the longest bull markets on record. Fifty-eight percent of retirees say they would employ the same investment strategy just before retirement, and 35% say they would have invested either “much more” or “somewhat more” aggressively if they could alter past decisions, the study finds.

“It’s clear from our research that many retirees may be vulnerable to sudden market corrections and volatility, which can adversely impact savings,” Wilson says. “Because many retirees rely on their investments for income and have more limited time horizons to recoup investment losses, a significant market downturn could significantly reduce their income. Working with a financial adviser, attending educational sessions available at the workplace, and accessing web-based financial planning tools may be helpful.”

Financial advisers generally caution retirees and pre-retirees against taking too much investment risk. Study respondents who worked with an adviser (46% of pre-retirees; 57% of retirees) say their adviser recommends they change their investment strategy. Of that group, 73% of pre-retirees and 88% of retirees report that their advisor recommends that they invest more conservatively.

Could TDFs help?

According to Wislon, customized investments where a professional money manager automatically shifts assets to more conservative investments as an investor nears or lives in retirement may be helpful for some people. However, target-date fund (TDFs) were introduced in the early 1990s, long after many study respondents started saving for retirement, which may be one reason why the adoption of those strategies among these retirees and pre-retirees appears to be relatively low among study respondents.

For instance, 29% of pre-retirees and 20% of retirees indicate they currently invest in TDFs (or invested in TDFs at the time they retired). Twenty percent of both groups are unsure.

However, many respondents indicate that TDFs might be beneficial, especially if an investor lacks the discipline or time to adjust his or her investments. Sixty-six percent of pre-retirees and 44% of retirees agree that TDFs would help.

A majority of respondents (66% of pre-retirees; 53% of retirees) also agree that TDFs are easy to use, the study finds. But, a significant number (38% of pre-retirees; 45% of retirees) would prefer to manage their own money.

The Internet-based study was conducted in January 2018 on behalf of MassMutual by Greenwald & Associates and polled 801 retirees who have been retired for no more than 15 years and 804 pre-retirees within 15 years of retirement.
The Markets March 26, 2018

CVS Wins Dismissal of Stable Value Fund Suit by 1st Circuit

The plaintiffs' showing that the CVS retirement plan's stable value fund departed from a study of other stable value funds' investments did not support a plausible claim that such decision-making was imprudent, the appellate court ruled.

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The 1st U.S. Circuit Court of Appeals has affirmed dismissal of a lawsuit that alleged the Employee Stock Ownership Plan (ESOP) of CVS Health Corporation and Affiliated Companies invested in a stable value fund that was “excessively concentrated in investments with ultra-short durations, and maintained excessive liquidity far beyond any reasonable need for it.”

The plaintiffs in the case argued that they received significantly lower crediting rates “than they would have received had the stable value fund been prudently managed in accordance with industry standards regarding duration and liquidity.”

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The case was previously dismissed by the US. District Court for the District of Rhode Island, which said the complaint includes no allegations from which it could be inferred that Galliard, the manager of the stable value fund, failed to adhere to the plan’s guidelines and investment objectives. Nor do the plaintiffs assert that Galliard assessed unreasonable or excessive fees or that it materially deviated from the disclosures in the plan documents. Instead, the newly asserted facts in the most recently amended complaint focus primarily on the extent and duration of the fund’s investment in cash or cash-equivalent assets, as compared to industry averages, and are intended to permit an inference that Galliard’s conduct was inconsistent with its duty of prudence. The District Court concluded the complaint was making an impermissible “hindsight” critique of Galliard’s management of the fund.

On appeal, the plaintiffs insist their imprudence claim against Galliard is “not based on mere hindsight criticism” of its investment strategy. In pressing this contention, the plaintiffs appear to be asserting that, with respect to the Employee Retirement Income Security Act’s (ERISA)’s requirement that a fiduciary exercise the prudence that “a prudent man” would use “in the conduct of an enterprise of a like character and with like aims,” the management of a fund labeled as a stable value fund constitutes the relevant “enterprise” of comparison.  From that implicit premise, the plaintiffs then contend that Galliard—by allocating 25% to 27% of the CVS stable value fund’s assets to an investment fund primarily holding short-term, cash-equivalent investments—“departed radically” from the investment standards and logic the plaintiffs insist their imprudence claim against Galliard is “not based on mere hindsight criticism” of its investment strategy.

Appellate court findings

Given what the plaintiffs contend was then-prevailing stable value management practice and logic, Galliard was imprudent in managing the CVS stable value fund, despite meeting the fund’s stated investment objective of outperforming money market funds, solely because the CVS fund was managed “too much” like a money market fund.

The 1st Circuit noted that it just recently rejected a claim that an ERISA fiduciary imprudently managed a stable value fund by, among other things, establishing too conservative of a benchmark (despite disclosing and then exceeding that benchmark) and not investing in higher-risk, higher-return instruments in Ellis v. Fidelity Mgmt. Tr. Co. In doing so, it indicated that conservativism in the management of a stable value fund—when consistent with the fund’s objectives disclosed to the plan participants—is no vice.

But, the plaintiffs contend that out-of-circuit precedent supports their position. However, the appellate court found that none of the cases on which the plaintiffs rely passed on the question presented here: whether allegations that a stable value fund invested a relatively high proportion of its assets in cash or cash-equivalents, and that such a “cash” allocation departed radically from the logic and practices of such funds suffice in combination to state a claim of imprudence under ERISA.

The complaint instead relies on the extent to which Galliard’s cash-equivalent allocations deviated from allocation averages in the stable value industry as well as from what the plaintiffs contend is the inherent logic of stable value funds. The appellate court noted that a claim resting on such evidence, however, runs into the concern that it recently set forth in Ellis. “For it is hard to see how the fact that a stable value fund was run conservatively indicates that it was being run imprudently, where ‘plaintiffs make no argument that offering more conservative investments (such as money market funds) would constitute an ERISA violation,’” the appellate court wrote in its opinion.

The plaintiffs emphasize the data contained in an industry survey that their complaint incorporates.  But, that survey sets forth the arithmetic mean of cash-equivalent allocations by all of the stable value funds participating in the survey for each year. The survey incorporated by the complaint indicates that the cash-equivalent allocations in the surveyed funds ranged widely—from 0.3% to 36.5% in 2011, and from 0.44% to 48.2% in 2012. And the complaint alleges that the CVS stable value fund’s allocation to a fund primarily invested in cash-equivalents was 44% in 2011 and 48% in 2012. “That means, with respect to the two years for which the survey provides data, that the CVS stable value fund’s cash-equivalent allocation was potentially outside the range of allocations made by the surveyed funds in 2011 but then was necessarily within the range of allocations made by the surveyed funds in 2012. In the absence of any additional context, these survey statistics thus show merely that Galliard charted a relatively more ‘cash’-focused course than most of the funds that were surveyed, while taking the most ‘cash’-focused course in one year but not in the next year. But, consistent with our reasoning in Ellis, we do not see how those facts alone can suffice to support a plausible claim that such decision-making was imprudent,” the 1st Circuit said.

Still left is the question whether the complaint states a claim against the CVS defendants for imprudently monitoring Galliard. However, the complaint alleges no harm other than the stable value fund’s underperformance as a result of Galliard’s alleged misallocation of the fund’s assets. “Because of our determination that this alleged harm is not cognizable under ERISA, there remains no basis for supporting a claim against the CVS defendants,” the appellate court concluded.

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