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.
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.”
By using this site you agree to our network wide Privacy Policy.
Participant Education Needed About Managed Accounts
While retirement plan sponsors increasingly see managed accounts as helpful to prepare participants for retirement, more education is needed to increase participant usage.
“We’ve seen a tremendous uptake in
managed accounts among our retirement plan clients, which is good news
because it contributes to good plan design, says Sangeeta Moorjani, SVP
of workplace managed accounts at Fidelity Investments in Boston.
On
Fidelity’s recordkeeping platform, about 40% of plan sponsors now offer
managed accounts to participants, and there is growth in the number of
employees utilizing these services, according to Moorjani.
Fidelity
surveyed sponsors and participants on its own platform and delved into
previous research it commissioned to try to understand why there has
been growth in managed account use.
“We considered whether plan
sponsors were hearing that managed accounts were a good feature to
adopt, or if there was some other reason in the growth in managed
account use,” Moorjani tells PLANADVISER. “We found that employers see
it as a retention tool, they actually see a lot of utility to it and
feel it is an important mechanism for employees to be retirement ready.”
According to the research, plan sponsors said workplace managed
accounts were “very important” to help employees prepare for retirement
(57%) and ensure employees are investing their retirement savings
appropriately (53%). Additionally, they see it as a way to retain
employees (51%) and attract the best employees to their company (49%).
Forty-three
percent of employers said that, based on their experience, employees
choose workplace managed accounts because they don’t know how to
properly allocate their investments, and 40% said it’s because employees
don’t have the skills needed to manage their portfolios.
NEXT: Employees’ views of managed accounts
Employers said that 78% of
participants were either very or somewhat satisfied with their workplace
managed account offering. Nearly half (48%) of employees that use
managed accounts said that the ongoing monitoring of their investments
was one of the most valuable things about the offering, compared to only
29% of non-managed account users who said that they think it would be
valuable.
Forty-four percent of managed account users said that
the annual review was valuable, compared to 27% of non-managed account
users. And, 38% of managed account users said that ongoing management
was valuable compared to 23% of non-managed account users.
When
asked to identify the major reasons to sign up for a workplace managed
account, 59% cited maximizing account growth, 49% cited ensuring
accounts are properly diversified based on unique goals and 45% cited
working with a professional.
More than one-third (35%) of
employers reported that employees don’t take advantage of workplace
managed accounts because they don’t fully understand how it can help
them, and 31% said that employees don’t understand the offering.
When
participants who don’t use managed accounts were asked why, they say
that it’s because they don’t understand what is being offered: 39% say
they lack understanding of what is being offered or the benefit, and 25%
say that not knowing enough about the offering is a major barrier to
use.
Nearly one-quarter (24%) of employees said they like
complete control over their investments, while 23% say they enjoy
managing their investments themselves. In addition, 32% said that worry
about giving up control was a major barrier to use.
Employees are
also concerned about fees: 23% said that managed account fees are too
high, and 62% said that fees were a major barrier to signing up for
workplace managed accounts.
NEXT: Education is needed
“While we’ve seen tremendous
increase of usage by employees, it is still not up to the level of
target-date fund usage,” Moorjani notes. “What became clear is that
people don’t understand how managed accounts work and their value.”
Educating
and clarifying how managed accounts help the employee is key, she adds.
As an example, Moorjani tells about a Fidelity retail employer client
with more than 70,000 employees that did a lot of education across
multiple channels when it adopted Fidelity’s Portfolio Advisory Services
at Work (PAS-W) managed account program. The employer saw a
year-over-year nearly 70% increase in employee use of managed accounts;
many more participants are taking guidance, and there was an overall 57%
increase in deferral rates.
Once the concept
is explained to employees, many think it is relevant and say they would
use the service. Fidelity’s research found 54% said that the concept was
relevant to them, 52% said they would find the service useful, and 46%
said they would like to find out more.
Moorjani explains that the
main difference between managed accounts and other professionally
managed investments such as target-date funds is there is personalized
guidance and personalized management of participant portfolio. A
professional looks at a participant's financial situation, risk
tolerance and savings patterns and develops a personalized portfolio. In
addition, there is ongoing monitoring of the participant’s portfolio
with shifts in the market, shifts in individual needs and shifts in plan
investment lineups.
“Especially in light of recent market volatility,
these things are valuable,” Moorjani concludes. “We almost think of
[managed accounts] as a shock absorber, keeping folks from being too
conservative or too aggressive.”