Data & Research September 16, 2024

It’s Time to Rethink Retirement, Says T. Rowe Price

According to a white paper from the firm, employers should customize benefits for a ‘transitioning to retirement’ workforce.

Reported by

The conventional image of retirement—in which workers stop working entirely at age 65 and exit the workforce for good—is no longer the reality for most Americans. Yet decisions about employment, benefits and savings often still assume this traditional path, according to T. Rowe Price’s latest white paper, “The Success of Defined Contribution Plans and the Road Ahead.”

Employers need to rethink how and when they shift full-time employees into a “transitioning to retirement” workforce, the paper suggested. Compensation and benefits must adapt to the shift. Some workers may prefer to have reduced hours while maintaining health coverage. Others might prefer forgoing benefits in exchange for more flexibility. Still others may want to switch roles and work in a more limited capacity. Employers must figure out how to accommodate these varying needs, T. Rowe Price stated, and should design a transitional workforce model and appropriate benefits.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Sudipto Banerjee, director of retirement thought leadership at T. Rowe Price, says plan advisers and plan sponsors do not directly identify the “transitioning to retirement” group.

“Ultimately, it is on the employee to decide when they are ready to take the steps toward transitioning into retirement,” he says. “Employers can best support this transition by offering flexibility in their policies around hours, compensation and benefits. Flexibility is key to retaining talent who are considering retirement.”

In addition to transitioning workers, there is a growing need to prevent “leakages” from retirement accounts. When emergencies arise, many workers dip into their retirement savings, jeopardizing their long-term financial security. The SECURE 2.0 Act of 2022—legislation aimed at boosting retirement savings—introduced some solutions, such as permitted hardship withdrawals and the creation of a new account type specifically for emergency savings, the pension-linked emergency savings account, or PLESA. However, the complexity of these options can make them difficult to implement and navigate.

The paper recommended an alternative approach, offering out-of-plan emergency savings accounts. These accounts allow workers to set aside money specifically for emergencies, reducing the need to tap into retirement funds prematurely. By nudging workers to contribute small portions of their salaries to these accounts, plan sponsors can help individuals build a financial cushion for unforeseen circumstances while preserving their retirement savings.

Retirement Income

Retirement income is also evolving, the paper explained, with new products emerging to help individuals manage their money in retirement. However, simply offering products like annuities or structured payouts is not enough; participants need help understanding how these products fit into their overall retirement strategy, the report’s authors argued. Deciding when to retire, when to claim Social Security and whether to downsize or relocate are all interconnected decisions.

Employers and plan advisers should focus not only on offering the right products, but also on providing education and guidance. Retirement planning needs to be comprehensive, showing participants how each decision impacts their long-term financial health, the report contended. By helping workers choose the right products for their individual needs, employers can empower them to make informed decisions that will secure their future.

As retiring becomes a more fluid and complex process, employers and policymakers must work together to develop new strategies for compensation, benefits and retirement planning, T. Rowe Price concluded. This will mean designing flexible workforce structures, addressing financial emergencies and offering personalized retirement income solutions.

Data & Research September 15, 2024

Mixed Results for Corporate Pension Funded Statuses

Most pension trackers reported that equity markets performed well in August but were offset by an increase in liabilities.

Reported by

The funding status for U.S. corporate pension plans in August saw mixed results, according to pension fund trackers. In general, equity markets experienced a positive performance over the month, and plan liabilities increased due to falling discount rates.

The Milliman 100 Pension Funding Index recorded its largest monthly drop this year, with the funded ratio dropping to 102.8% at the end of August from 103.6% at the end of July. Milliman found that although August’s investment gains of 1.81% lifted the plans’ market value by $17 billion, to $1.347 trillion at the end of the period, it was not enough to compensate for a 20-basis-point decline in discount rates for the month.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“As in July, both assets and liabilities increased during the month, but investment gains weren’t enough to offset liability increases,” said Zorast Wadia, author of the report, in a statement. “With markets falling from all-time highs and discount rates starting to show declines, pension funded status volatility is likely in the months ahead, underscoring the prudence of asset-liability matching strategies for plan sponsors.”

Russ Kamp, managing director of Ryan ALM Inc., wrote in blog post that falling rates are not a “panacea” for pension plans, unless the drop in rates rallies equity markets to a greater extent than the drop in rates impacts the growth in pension liabilities.

The WTW Pension Index also found that funded status decreased slightly in August. Like Milliman, WTW found that positive investment returns were more than offset by increases in liabilities due to decreases in discount rates, resulting in an index level of 116.0, a decrease of three-tenths of a percentage point over the prior month.

‘Tumultuous Month’

Agilis noted that most pension plans experienced relatively no change or a marginal decline in funded status in August as market returns matched or lagged slightly behind liability growth, depending on asset allocation. According to its analysis, Agilis reported Treasury yields moved lower again in August as the market reacted to Federal Reserve Chair Jerome Powell’s indication that the Fed will cut rates in September.

Agilis also stated that August was a “tumultuous” month for equity investors, with disappointing economic data and a weak U.S. jobs report coupled with an interest rate hike by the Bank of Japan. U.S. and international equities ultimately rebounded to post monthly gains, Agilis found.

“As we’ve been saying all year, volatility is going to be the biggest driver in pension plan funded status during 2024 and we continue to see that playing out,” said Michael Clark, managing director at Agilis, in a statement. “While August asset returns ended positive, the road was not without some significant bumps. September is keeping on theme with markets down in the first week. Any piece of economic data is causing reverberations in the markets and with interest rates, and we expect that will continue in the lead up to September’s Fed meeting and the November elections in the U.S.”

Mercer concluded in its analysis of S&P 1500 companies that the estimated aggregate funding level of pension plans remained level in August at 108% as result of a decrease in discount rates, offset by an increase in equity markets.

“Pension funded status for the S&P 1500 in August remained level due to equity market gains and lower interest rates,” said Scott Jarboe, a partner in Mercer’s wealth practice, in a statement. “Signals from the Fed indicate that rate cuts are imminent, which may result in lower short-term interest rates. However, the ultimate impact on pension plan funded status remains unclear as long-term interest rates play a more significant role.”

Jarboe added that plan sponsors should take a careful look at their plan’s interest rate risk, as plans with significant interest rate exposure may see decreases in funded status if long-term rates decline.

Asset Rise Still Outpaced Liabilities, per Wilshire

Meanwhile, a few firms found that funded statuses increased in August.

LGIM America’s Pension Solutions Monitor estimated that pension funding ratios increased slightly to 109.9% from 109.5% last month. While it found that both global equities increased 2.6% and the S&P 500 increased 2.4%, it recorded that plan discount rates were estimated to have decreased 19 basis points over the month, driven by the Treasury component falling 16 bps and the credit component tightening 3 bps.

Wilshire also found that the average funded ratio increased by an estimated 0.4 percentage points, ending the month at 102.3%. The increase in funded ratio resulted from a 1.7% increase in asset value, slightly offset by a 1.3% increase in liability value, according to Wilshire.

This is the eighth consecutive month that asset values rose more than liability values, Wilshire found.

Aon’s Pension Risk Tracker similarly found that the average funded ratio for pension plans increased to 100.7% from 97.8%. Aon recorded that the funded status improved by $46 billion, driven by liability decreases of $30 billion compounded with asset increases of $16 billion.

Aon also found that asset returns were up throughout August, ending the month with a 2.0% return.  

«