Client Service March 1, 2018

Trend for Accelerating DB Funding Set by Largest Plans

“We expect others in the industry will take similar actions,” says Justin Owens, director, Client Strategy & Research, Russell Investments.

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Following a pattern as trendsetters, the 20 members of the $20 billion club collectively dismissed funding relief and paid more than triple their mandated contributions in 2017, according to Russell Investments.

Each corporation in the $20 billion club maintains global pension liabilities in excess of $20 billion. These collective global liabilities represent approximately 40% of all the defined benefit (DB) plan liabilities held by U.S.-listed companies.

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For the first time since 2013 (when rates rose and equity markets cooperated), funded status meaningfully improved. This was despite discount rates (grouped into “actuarial losses”) falling. In fact, for the first time since 2009, actuarial gains/losses were not the leading driver in funded status changes; net asset returns (asset returns in excess of interest cost) were.

According to Justin Owens, CFA, FSA, EA, director, client strategy and research at Russell, while total 2017 contributions were the single largest ever recorded, just as noteworthy was the contribution above requirements. “Recently many sponsors have been content to contribute to their DB plans only when they were required to. In contrast, they took a proactive approach in 2017 by contributing discretionary amounts in order to satisfy objectives beyond the government-mandated minimum,” he says.

Between the years of 2009 and 2013 the total contributions hovered from about $25 to $30 billion. Since Moving Ahead for Progress in the 21st Century Act (MAP-21)—and its successors the Highway and Transportation Funding Act of 2014 (HATFA) and the Bipartisan Budget Act of 2015—was passed, contributions have generally been much lower, bottoming out at about $13 billion in 2015 when funding relief was in full effect.

Tax reform and Pension Benefit Guaranty Corporation (PBGC) premiums were the key contribution motivators, according to Russell Investments. Funding contributions with cash, company equity, and borrowing all took place in 2017.

With tax reform finalized, several members of the $20 billion club have announced massive contributions for 2018, Russell notes. “We expect others in the industry will take similar actions,” says Owens.

Accelerating DB contributions in the future will still benefit plan sponsors.
Client Service March 1, 2018

Americans Plan to Turn to Advisers for Tax Reform Guidance

The Tax Cuts and Jobs Act has also increased Americans’ appetite for equities.

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Asked who they will turn to for help navigating the Tax Cuts and Jobs Act, Americans most commonly cited financial advisers (25%), followed by accountants (14%) and tax-preparation services (11%), TD Ameritrade learned in an online survey of 1,000 adults with at least $10,000 in investable assets, conducted in late January. A mere 25% said they understand the new law.

“There are plenty of experts offering their views on the new tax code and how investors should respond, yet we find, once again, that investors want advice and guidance from someone they trust, especially in times of uncertainty and change,” says Tom Nally, president of TD Ameritrade Institutional. “People want to know that someone has their back. More often than not, that trusted individuals is their personal financial adviser.”

Thirty-five percent of Americans said they expected to see larger paychecks as a result of the reform, although 22% expected to take home less. Views on whether the new law benefits the country are also mixed, with 41% believing they will benefit the economy, and 35% thinking they will have a negative effect. Sixty-three percent said they think people who earn more than they do will benefit more, and 55% said that very wealthy people will benefit the most.

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Twenty-two percent of Americans said they love the new tax plan, 29% said they hate it, and 49% said they are neutral. Among Republican Americans, 42% love it, a mere 9% of Democrats said the same, while 20% of Independents said the love the new law. Wealthier households, those with investable assets of $250,000 or more, love the new law, while this is true for only 22% of those in the $100,000 to $249,000 bracket and 20% of those in the <$100,000 bracket.

Thirty percent said they expect the taxes they will pay next year for 2018 will be lower than this year, 33% expect to pay more, 24% said they don’t expect and changes, and 13% said they didn’t know what the outcome will be.

The survey also found that Americans have an increased appetite for equities, with 30% wanting to invest in individual stocks, 23% in equity mutual funds and 15% in equity exchange-traded funds (ETFs). Fifty-seven percent said they would consider contributing more to their retirement account, and 24% said they would consider moving to an area of the country with lower taxes.

Koski Research conducted the survey for TD Ameritrade. The full findings of the report, Americans & Taxes: An Individual Investor Survey, can be downloaded here.

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