Data & Research December 16, 2013

Recruiting Worries as Boomers Retire

Worries about recruiting and training new talent, as more Baby Boomers retire, top the list of challenges facing plan sponsors and advisers of 403(b) plans.
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While nearly seven in 10 (69%) plan to replace the majority of Boomer-aged retirees, well over a third (38%) of 403(b) plans expect to face significant challenges in doing so, according to a new survey of 403(b) plan sponsors from the Plan Sponsor Council of America (PSCA) and the Principal Financial Group.

Issues in retirement benefit delivery could mean wider problems for the nonprofit institutions that traditionally provide 403(b) plans as a means of attracting top-quality workers, survey authors argue. 

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“Many nonprofit organizations rely heavily on 403(b) plans—instead of salaries—to compete for the best employees,” says Bob Benish, executive director of PSCA. “We’ve seen 403(b) plans improve dramatically over recent years. It is clear those plans will be increasingly important in the race for high performers, especially in higher educational institutions.” 

Other survey results show more than half of all 403(b) sponsor respondents (54.4%) expect between 10% and 20% of their work force to retire over the next five years.

However, 20% of larger organizations (500 or more employees) expect to lose one-fifth of their work force to retirement. Most are higher educational institutions, according to the survey, where a spike in hiring professors in the 1970s and 1980s is leading to a significant number of potential retirements in the near future.

“As a generation of academics nears retirement, financial professionals have another reason to focus on higher education as an opportunity to grow their business,” says Aaron Friedman, national tax-exempt practice leader for The Principal. “Financial professionals who can help enhance plan designs—making plans more successful and therefore better appreciated by employees—stand to position themselves well in this burgeoning nonprofit marketplace.”

In addition to concerns over recruiting, survey respondents say the other top anticipated challenges include:

  • An increased need for training (42.7%);
  • Skill gaps in the workforce (39.9%);
  • The reallocation of responsibilities causing a burden on remaining employees (38.1%); and
  • Increased use of technology (33.5%).   

While seven out of 10 plan sponsors believe planning for retirement is the employees’ responsibility, slightly less (66.8%) are active in providing retirement planning education tool and materials. For larger organizations, 90% of plan sponsors are active in employee retirement planning education.

“403(b) sponsors recognize the need to both encourage employees to accept responsibility to prepare for their own retirement and at the same time help them prepare for the transition,” Benish says. “That is important because while employees generally expect to work into their 60s, studies consistently show many end up retiring before they planned, often due to health reasons.”

Survey results are available at http://www.psca.org/403-b-plan-research.

The PSCA is a national nonprofit association of 1,200 companies and their six million employees. The group advocates for increased retirement security through defined contribution (DC) programs to federal policymakers.

Data & Research December 16, 2013

De-Risking Strategies at Important Juncture

Many mid-market pension plans are considering de-risking, but still need to create a formal strategy.
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The 2013 Pyramis U.S. Corporate Mid-Market Pulse Poll, conducted by Pyramis Global Advisors in association with Asset International, publisher of PLANADVISER, found with some unsure of a specific end state for their plan, mid-market pension plan sponsors are at “a pivotal juncture.” The survey findings show these plan sponsors need a long-term strategic objective and formal de-risking triggers.

However, when trying to decide whether to de-risk their pension plans, there are several factors for plan sponsors to consider, says Chuck McKenzie, head of institutional solutions at Pyramis. “Plan sponsors have to think about what information they will need to be able to say yes or no to de-risking a plan,” McKenzie told PLANADVISER.

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The survey results show 15% of plan sponsors are concerned about the current funded status of their plans. McKenzie says in light of this concern, “Plan sponsors definitely need to look at the plan’s funded status in deciding whether or not to de-risk. It’s really not doable for a plan to de-risk if its funding ratio is at 60% or lower.”

There are other factors that should be considered as well, says McKenzie. “You have to compare what it would cost to fully fund the plan versus what it would cost to terminate the plan, since those two costs are often very different. You also need to determine if you have the internal staff or consultants necessary to carry out de-risking.”

Risk management is definitely a priority with plan sponsors according to the survey results, with nearly one-third (31%) saying it is their top concern with regard to their plan’s investment portfolio.

One way plans are trying to better manage their risk profile is by reducing exposure to domestic markets. “Plan sponsors are more risk aware than they were 10 or even five years ago. They want to be smarter about diversifying than they have been in the past. They want to make their risk profile look better than what the traditional 60/40 split of domestic stocks and bonds can provide,” says McKenzie.

McKenzie says it was surprising to find only one in four plans have a program to de-risk over time. "We also found that two-thirds of plan sponsors say they spend more time on their pension plan than they did five years ago. And we found that less than half of those we polled say they will de-risk, due to the fact that they simply don’t have the time and resources to dedicate to it.”

He adds that plan sponsors do want to know their options are, and be able to carry out the most appropriate one when needed, so they are outsourcing these evaluation tasks. “We found that 49% of plan sponsors are either outsourcing such tasks to a service provider or a strategic partner,” says McKenzie.

The survey results also point to the need for set of triggers to be established, indicators that would signal to plan sponsors whether conditions are right for de-risking. The top triggers noted are improved funding status of the plan (31%), a significant increase in long-term interest rates (17%), and a philosophical shift in focus toward managing the volatility of their funding status (15%).

However, when asked if they had such triggers in place, only 15% of plan sponsors say yes, with 55% of plan sponsors saying they do not and 30% saying they do not but intend to establish them in the future.

Pyramis has released a report titled “Liability Transfer Using Annuity-in-Kind Portfolios: An Effective Risk-Management Approach for Plan Sponsors,” to supplement findings of the survey. More information about the report can be found here.

The survey was conducted online during September and October. The 166 U.S. corporate mid-market institutional investors surveyed have plan assets under management between $50 million and $500 million. The cumulative assets under management represented by respondents totaled more than $32 billion.

More information about the survey can be found here.

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