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Insight on Plan Design & Investment Strategy
Updated: 1 hour 8 min ago

Consider the More Conservative Investments Pre-Retirees Should Hold

4 hours 18 min ago

After a year of exceptional returns in 2019, gathering headwinds could hinder retirement plan returns in 2020 and beyond, according to Retirement Outlook 2020 from MFS Investment Management.

“We estimate that a hypothetical portfolio of 60% equities and 40% bonds will have a 10-year annualized return of approximately 3.6% [over the next 10 years] as compared with a return of 7.2% over the past 10 years,” say report authors Jon Barry, senior retirement strategist, and Jessica Sclafani, DC strategist, at MFS in Boston.

Barry says this is an educated estimate based on research. On the equity side, “We feel good about sales growth and dividends, but we don’t feel as good about corporate margins and profits and just valuations in general,” he says. “Stocks are trading at a very high price-to earnings ratio, and we don’t see that as sustainable. With the trade wars, and as unemployment remains low and wage growth cuts into margins, companies will be restrained.”

As for fixed income, Barry says, “Rates are historically low, and we don’t see anything in the near term that will make rates move higher in a meaningful way. Starting yields are a good predictor of where returns will be. Treasuries are yielding around 2%, and it’s not unreasonable to expect the same,” he says. “Central banks in the U.S. and around the world have extended a lot of resources available to keep the positive cycle going. We question how much they have left to do to keep it going.”

The report notes that defined contribution (DC) plan sponsors made substantial allocations to passive investment strategies over the past decade, mostly due to costs concerns. But, it says, “The new year presents an opportunity for sponsors to revisit their allocations to active investment strategies, which could offer additional returns in a low-growth environment and provide some level of risk management when the current cycle comes to an end. These characteristics of active management will be particularly crucial for participants approaching retirement, who are vulnerable to sequence of returns risk.”

As participants approach retirement, common wisdom is to move to more conservative investments, but considering the low interest rate environment’s effects on fixed income investment vehicles, Barry and Sclafani suggest plan sponsors also revisit participants’ fixed income investments, including both core options on the DC plan investment menu and fixed income allocations in qualified default investment alternatives (QDIAs) such as target-date funds (TDFs).

Sclafani notes that traditional U.S.-based core (and core plus) fixed income funds have been the most prevalent in DC plans. “We think because of the low-rate environment and other reasons, plan sponsors should broaden and diversify access to fixed income investments in their core investment menus as well as TDFs,” she says.

To broaden and diversify access, Sclafani suggests plan sponsors should consider global bond and global opportunistic funds. “Participants approaching retirement are generally increasing their fixed income exposure, but they are also increasing their exposure to interest rate risk. If all of their fixed income investments are in core or core plus vehicles, that exaggerates their interest rate risk. If they diversify with global opportunistic strategies, they will get a different interest rate exposure from a geographic perspective,” she says.

Barry says global bonds tend to have a shorter duration than U.S. bonds, and having a good short-duration bond fund in a portfolio is important. “Look at high-yield bonds and emerging market debt for potentially higher yields, not just for those nearing retirement, but for all participants,” he says. He adds that these investments also come at a higher risk so plan sponsors should very thoughtfully add them into the investment lineup. Barry also suggests considering Treasury Inflation-Protected Securities (TIPS) for inflation protection.

“We’re not advocating that sponsors necessarily add these investments as standalones on the investment menu,” Sclafani says. “Consider mixing them into other strategies, such as a white label fund or TDF.”

Sclafani mentions a survey MFS fielded in the first quarter of 2019 of approximately 1,000 DC plan participants who were approaching retirement. While a majority of the participants identified the need to increase their focus on fixed income as they age, only about 20% answered that they were likely to add to their fixed income investments.

According to the MFS Retirement Outlook 2020 report, “We view this disconnect as an opportunity for sponsors to support participants approaching retirement by packaging their fixed income for them.” Sclafani says this includes white label funds and TDFs, as she mentioned. “The obvious construct is in the plan’s QDIA. We encourage plan sponsors to review their TDFs and take a deep dive into the fixed income allocation—not just the level of fixed income allocations along the glidepath, but the components of the fixed income allocations,” she says.

The percentage of DC plan sponsors with a policy for retaining the assets of terminated and retired participants in their plans has increased steadily since 2015, according to the Callan 2020 DC Trends Survey. Sclafani says this is true particularly in the mega plan market. And, to help participants with decumulation strategies, more DC plan sponsors are including income solutions in their plans. A survey from Willis Towers Watson found that among those that offer a lifetime income solution, the most common is systematic withdrawals (80%), followed by lifetime education and planning tools (70%) and in-plan managed account services (44%). Only 17% offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component. Fifteen percent support out-of-plan annuities, and 15% offer in-plan deferred annuity investment options.

“Sometimes the industry equates retirement income solutions with annuities, and that is not the case,” Sclafani says. “To make a DC plan a retirement income vehicle, plan sponsors should review plan distribution options, consider offering managed account programs with financial wellness components, and make advice available to participants approaching retirement age. This is when participants are more engaged and looking for advice.”

A BlackRock analysis suggests that given some negative views of annuities, plan sponsors could consider in-plan income options that are not guaranteed.

“A lot of it comes down to providing education and tools,” Barry says. “Even for younger folks, if we’re looking at a lower-return environment, DC plan participants need to think about saving more or deferring retirement. Plan sponsors should make sure they have the tools or access to advice to model outcomes and to help participants think through their strategy for taking Social Security.”

The post Consider the More Conservative Investments Pre-Retirees Should Hold appeared first on PLANSPONSOR.

Categories: Industry News

Employees Say Video Is Preferred Method for Learning

4 hours 29 min ago

A survey from video technology provider Kaltura found employees prefer video for learning.

Though the survey focuses on employee training and development, the responses are informative for retirement plan sponsors, providers and advisers who develop or offer retirement plan and financial wellness education. Among the 1,200 full-time professionals who work at companies with more than 500 employees across the United States, 69% said they would rather learn a new skill from video than from a written document. Video is the preferred learning method among all demographic groups.

However, 72% of employees admit they do not give training videos their full attention, skimming them, watching without sound, listening while doing something else, or ignoring them completely. There is a difference between generations; 44% of Baby Boomers report always paying attention to training videos, but among Generation X, Millennials, and Gen Z, only 23% to 24% report watching training videos with full attention.

Survey responses suggested ways to improve employee engagement with video training. Eighty-two percent said they believe interactive videos hold their interest better than traditional videos. Kaltura said videos can be made interactive by techniques such as adding hotspots that link to additional materials or videos, embedding quizzes in the video, and even building videos where content and storyline change depending on the viewer’s choices. “Interactive, personalized videos create a lean forward experience that drives increasingly better results,” the company says.

In addition, 64% of respondents said their employers are using live broadcasts or virtual classrooms for training, in which trainees can learn in real time and interact with their instructor.

To download a copy of the report, visit

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Categories: Industry News

DCIIA and SPARK Collaborate on Cybersecurity and More

6 hours 36 min ago

The Defined Contribution Institutional Investment Association (DCIIA) and the SPARK Institute (SPARK) recently announced a plan to partner on several joint projects in 2020.

The advocacy organizations tell PLANSPONSOR their objective in forming this partnership is to more efficiently focus on shared goals and initiatives that promote the U.S. retirement system and improve savings and retirement security for working Americans. Lew Minsky, president and CEO of DCIIA, notes his organization is recognizing its 10th anniversary in 2020, and that he looks forward to working even more closely with Tim Rouse, SPARK Institute executive director.

Moving forward, the SPARK Institute will become a founding member of the DCIIA Retirement Research Center and utilize its capabilities to conduct primary research on recordkeeping issues, policy developments in Washington and more. Other potential topics of research mentioned by Minksy and Rouse include the electronic delivery of retirement plan documents, as well as the subjective behavioral tendencies and decisions of real-world investors and participants. Both organizations see their new collaboration leading to significant expansion in their collective research capabilities. 

“We believe there is a gap in the current research landscape and in the dialog about retirement planning,” Minsky says. “With SPARK and DCIIA working together, we are going to be able to pull together all the right parts of the ecosystem to execute on truly market-informed, policy-relevant research. We aim to provide insight which is practical and actionable and which will make a difference in the way we talk about plan designs, investment structures, administrative strategies, etc.”

Minsky and Rouse say they particularly look forward to working together on the linked topics of cybersecurity, fraud prevention and financial services technology development. They also cite blockchain technology as an exciting area to study.

“The industry has realized that by working together on cybersecurity issues, we are stronger than if we remain in our own silos,” Rouse says. “Cybersecurity and fraud prevention is not an area where companies in this space are looking to get a competitive advantage over one another—quite the opposite. We are promoting a cooperative outlook and we have been putting together best practices and case studies for what works and what doesn’t work in cybersecurity.”

Minsky and Rouse recall an industry event DCIIA and SPARK held in October 2019, during which the topic of blockchain was discussed. A blockchain is a series of records of data that cannot be modified and is managed on computers of different entities. Each of these blocks of data are secured and bound to each other using cryptographic principles. The interest and enthusiasm around the topic inspired the two leaders to make technology development a key theme in their 2020 collaboration.

“The consensus at that event was that blockchain could have a huge impact on our space,” Rouse observes. “Like cybersecurity, blockchain is an area where collaboration is needed and which thrives on a consortium model. At the 2019 event, the most popular ideas for the use of blockchain were creating protected digital identities for participants, and doing the same thing for plan data. We’re just at the beginning of this conversation, but it’s a very important one to start.”

Another main part of the DCIIA and SPARK Institute collaboration will be a series of conferences that look at the state of the U.S. retirement system and compare this to the global outlook. The goal is both to learn from places like Australia or the United Kingdom while also being able to pass on what U.S. employers and service providers have learned.

“Over the last few decades we have seen a significant transformation in the U.S. retirement system, and globally that transition is a little behind where we are,” Minsky says. “We have knowledge to share, and on the other hand, we can learn from the automation best practices they have implemented in the United Kingdom, or the high default savings rates in Australia. We will be studying all of this.”

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Categories: Industry News

OneAmerica Enhances Web Design for Group Annuity Platform

7 hours 1 min ago

OneAmerica launched a new design for its group annuity digital platforms, used to administer company retirement plans.

Changes were made in response to feedback about functionality from retirement plan sponsors, advisers and third-party administrators (TPAs). The new look provides an engaging experience and streamlines page navigation.

OneAmerica tells PLANSPONSOR the design change allows it to shift its focus to holistically examine the user experience as it is designing new features.

The improvements involve accounts operated by 5,000 financial advisers, close to 2,000 TPAs, and approximately 21,000 individuals at the employer level who handle retirement plans for their personnel.

“We are known in the industry for our emphasis on relationships, education and customization,” says Sandy McCarthy, president of retirement services. “We’re proud of these digital enhancements because they really showcase our commitment to all three factors that differentiate us, and they build a foundation of human-centric, intuitive and seamless experiences for our stakeholders.”

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Categories: Industry News

SURVEY SAYS: Best Picture Oscar Winners 2020

Mon, 2020-01-20 03:30

Last week, I asked NewsDash readers, “Which 2020 nominee for Best Motion Picture do you think should win the Oscar?”

But first, I asked which of the Best Picture Oscar nominees they’ve seen. No one saw Jojo Rabbit, and no one saw all of them. The movie seen by the most responding readers was Once Upon a Time… in Hollywood, with 25.8% selecting it. Ford v. Ferrari was seen by 6.4% of respondents, The Irishman was seen by 22.6%, and Joker was seen by 3.2%. Nearly two in 10 (19.3%) respondents saw Little Women, 12.9% saw Marriage Story, 6.4% saw 1917, and 3.2% saw Parasite. Nearly 42% of responding readers said they haven’t seen any of the movies nominated.

Though it was only seen by a small number of readers, 1917 was selected by 30.4% as the nominee that should win the Oscar. This was followed by 17.4% who said Little Women should win, and 13% each selected Ford v. Ferrari and The Irishman. Joker, Marriage Story and Once Upon a Time… in Hollywood were each selected by 8.7% of responding readers as being the movie they think should win the Oscar.

Among the few readers who left comments, there seems to be some disdain for the Oscars—either the award itself or the show. One suggested a different movie that should win, and another said the movies he or she had seen were all horrible. There is no Editor’s Choice this week. A big thank you to all who participated in the survey!


Rich people patting themselves on the back.

The real best movie of the year – by far – was Uncut Gems. Great lessons about investing for retirement in it too!

Winning an Oscar has become a real crap shoot. Who knows?

At this point, who cares what the Oscar committee thinks? Enjoy the movies that make you feel something. All the rest is nonsense.

I just realized I haven’t seen any of them…. and I’m okay with that. I look forward to others’ feedback.

I enjoy watching the award shows, but often think the entire event is so over-rated. Hollywood really likes to pat themselves on the back publicly. Where are the awards for the sciences, education, medicine, etc.?

The three movies that I saw were, in my opinion, all horrible. I don’t think any of them should have even been nominated!

Usually the movies I enjoyed are never nominated.

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Categories: Industry News

Retirement Industry People Moves

Fri, 2020-01-17 13:43
Transamerica Increases Client Engagement Team for Mega/Large Plans

Transamerica has expanded its client engagement team for mega/large retirement plans with the elevation of Andrea Thompson and Manny Pedro. The company also announced that Sarah McEleney, Joe Centofanti, and Kevin McDonald joined the company as client executives.

Thompson has previously worked in customer service at Transamerica focusing on mid-size retirement plans. She holds a master’s degree from The University of Hartford and is a certified financial planner (CFP). She will report to John Taylor, regional director.

Pedro was elevated to senior client executive. He will serve clients across the country that use Transamerica’s Total Retirement Outsourcing and report to Stefanie Signorello, regional director.

McEleney joins Transamerica with 15 years of experience in the employee benefits industry. She is an accredited investment fiduciary through the Center for Fiduciary Studies, and a certified plan fiduciary adviser through the National Association of Plan Advisors. She will be based in Tampa, Florida, and report to Robert Rooney, regional director.

Centofanti returns to Transamerica to focus on large-market retirement plans in New York City and surrounding areas. With 22 years of experience specifically in customer service of retirement plans, he holds a bachelor’s degree from Pace University. He will report to Matt Hummel, regional director.

McDonald joins Transamerica with more than 20 years of experience in relationship management and retirement plans. He will focus primarily on helping large retirement plan clients in Ohio and surrounding areas. McDonald holds a bachelor’s degree from Marietta College.  He will report to Taylor.

Mercer Adds Investments and Retirement Business Leader

Mercer has hired Brandi Wust as Tri-State Business Leader for its investments and retirement business.

In this newly created position, Wust will help Mercer drive strategic initiatives and define and implement the company’s local business strategy for the greater New York, New Jersey and Connecticut area. She will also play a role in the company’s business development efforts through acquiring new clients as well as expanding relationships with current clients.

Wust brings over 20 years of experience to the role, providing strategic investment solutions to clients with a wide range of institutional asset pools.

Most recently, she served as a senior director and the Northeast Investment leader at Willis Towers Watson, where she focused on identifying, cultivating and expanding client opportunities in the investment space. She is based in New York and will be reporting to Marc Cordover, senior partner and east wealth business leader for Mercer effective immediately.

RiskFirst Hires Former PBGC Head

Fintech company RiskFirst has appointed Charles Millard to develop its North American defined benefit (DB) pensions client base, which includes pension plans, consultants and asset managers.

RiskFirst provides risk analytics and reporting solutions to the pensions and investment markets through its platform PFaroe.

Millard has held senior positions within the industry for nearly 20 years, including at the Pension Benefit Guaranty Corporation (PBGC), Citigroup and BP Direct Securities.

“RiskFirst is a leading organization with cutting-edge technology, and I am extremely pleased to become part of the team,” comments Millard. “I am looking forward to helping RiskFirst advance its client base and, through the power of its technology, helping to ensure North American pensions can meet the challenges of an increasingly complex market.”

Segal Acquires Public-Sector Implementation Services Provider

Segal has acquired LRWL Inc., provider of public-sector retirement systems implementation services.

The LRWL team has become part of Segal’s Administration, Technology and Consulting (ATC) practice.

“In acquiring LRWL, we are building on Segal’s strong core competencies and enhancing our ability to support public-sector retirement systems,” says David Blumenstein, president and CEO of Segal. “Our strengths complement each other, and this acquisition reaffirms Segal’s continued commitment to providing public-sector entities with the highest level of consulting services.”

“We look forward to offering clients access to Segal’s robust consulting capabilities,” says Leon Wechsler, president of LRWL, who has joined Segal as vice president and senior consultant. “Both of our companies are known for assisting clients through a personalized approach rather than providing the one-size-fits-all approach. We will soon be able to offer even more personalized options to meet client needs.”

Former AXA Equitable Life Rebrands

Equitable–formerly known as AXA Equitable Life–unveiled the brand it will operate under as an independent, U.S.-based company.

“Today we herald the next step in our journey as an independent company,” says Equitable CEO Mark Pearson. “Throughout our 160-year history, we have helped millions of Americans reach their goals and achieve financial security. As one of this country’s most enduring brands, the name Equitable is at the core of our commitment to help clients secure financial well-being so they can pursue long and fulfilling lives.”

The company offers variable annuities, tax-deferred investment and retirement plans, employee benefits, and protection solutions for individuals, families and small businesses. Equitable’s broad portfolio is distributed through an affiliated retail channel, Equitable Advisors, with approximately 4,330 registered and licensed financial professionals, and through third-party distribution platforms.

The company has changed its logo, now representative of the Greek goddess Athena. The new logo is said to signal Equitable’s values of optimism, empowerment and progression.

“We believe at the heart of every financial decision is a life decision,” says Equitable President Nick Lane. “To be fully invested and deliver the best advice and strategies, we must know our clients as individuals. Financial planning can be a deeply emotional and personal subject, and our promise is to take a lifelong, holistic view of our clients’ goals, dreams and aspirations so we can help them navigate their unique journeys.”

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Categories: Industry News

Prudential Investment Management Fined for Inaccurate Investment Information

Fri, 2020-01-17 11:57

The Financial Industry Regulatory Authority (FINRA) has published a letter of acceptance, waiver and consent entered into by member firm Prudential Investment Management Services (PIMS).

Underlying the letter, in which Prudential accepts FINRA’s settlement terms but neither affirms nor denies any specific allegations, is a challenge by FINRA suggesting that Prudential provided retirement plan clients with inaccurate expense ratio information and historical performance information.

“During at least the period January 2010 to June 2017, PIMS provided employer sponsors and employee participants, in retirement plans administered and/or maintained by the Prudential Retirement business unit, with inaccurate expense ratio information and historical performance information for numerous investment options in defined contribution plans offered through a group variable annuity,” the letter states.

In addition, FINRA says, from at least October 2003 to December 2018, PIMS provided inaccurate third-party ratings for investment options in retirement plan group variable annuities.

“PIMS made these misstatements in nine different types of communications, including customer statements and quarterly fact sheets,” FINRA says.

Additionally, according to FINRA, from at least January 2004 to September 2019, in multiple client-facing publications, PIMS provided performance data for money market funds available as investment options in retirement plans, but failed to provide “seven-day yield” information as required by Rule 482(e) under the Securities Act of 1933.

“Throughout the period of these violations, PIMS did not have supervisory systems or written supervisory procedures reasonably designed to achieve compliance with the content standards of FINRA’s advertising rule by ensuring that its communications to customers about retirement plan investments and related investment options were accurate,” the letter states. “By virtue of the foregoing, PIMS violated NASD Rules 2210(d)(1)(A) & (B), 3010(a) & (b), and 2110, and FINRA Rules 2210(d)(1)(A) & (B), 3110(a) & (b), and 2010.”

As part of this matter, PIMS has consented to a censure and a fine in the amount of $1 million. There are also non-monetary elements agreed to. For example, the firm has agreed to retain at its own expense one or more qualified independent consultants “not unacceptable to FINRA” to conduct a comprehensive review of the adequacy of the firm’s compliance with FINRA Rules 2210(d)(1)(A) & (B) and 3110(a) & (b), in connection with the violations described.

The letter further states that, once retained, PIMS “shall not terminate the relationship with the independent consultant without FINRA’s written approval; respondent shall not be in and shall not have an attorney-client relationship with the independent consultant and shall not seek to invoke the attorney-client privilege or other doctrine or privilege to prevent the independent consultant from transmitting any information, reports or documents to FINRA.

PIMS provided the following statement: “Transparency, doing the right thing, and maintaining constructive relationships with regulators are foundational to how Prudential conducts business. Upon discovery of the issues following a FINRA inquiry, Prudential conducted a thorough review, reported its findings, and fully cooperated with FINRA. We have taken action to address the issues and are pleased to have this matter resolved.”

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Categories: Industry News

State of Membership Organizations/Industry Associations Retirement Plans

Fri, 2020-01-17 11:49

Membership organizations/industry associations retirement plans rank No. 2 among all industries when it comes to average participant deferral rate (8.8%), according to the PLANSPONSOR 2019 Defined Contribution (DC) Survey. They also rank in the top 10 for average account balance ($118,376).

The PLANSPONSOR 2019 Defined Contribution (DC) Survey results incorporate the responses of 3,472 plan sponsors from a broad variety of U.S. industries. Within the survey, 52 respondents are from membership organizations/industry associations.

Among membership organizations/industry associations, 86.5% offer a 401(k) plan and 15.4% offer a 403(b) plan. More than one-quarter (27.5%) offer a traditional defined benefit (DB) plan, and 3.9% offer a cash balance plan.

Now that the SECURE Act allows for multiple employer plans (MEPs) for employers that do not share a common nexus, the industry is wondering how those plans may be set up. This provision is effective January 1, 2021, and David Whaley, partner at Thompson Hine LLP in Cincinnati, Ohio, says he anticipates some MEPs will be sponsored on day one. “There are already pooled plans among trade associations. I think they will choose to treat themselves as open MEPs, now that the SECURE Act allows them to file a single Form 5500, and they will make modifications to be ready on January 1, 2021,” he says.

The 2019 PLANSPONSOR DC Survey finds that two-thirds (65.3%) of membership organizations/industry associations retirement plans are “safe harbor” plans. The average participation rate is 80.3%, compared to 78.9% for plans in the survey overall.

The most common service delivery model among membership organizations/industry associations retirement plans (44.9%) is a fully bundled arrangement—the same recordkeeper and trustee, and all of the investments are managed by the recordkeeper. Recordkeeper reviews are done annually by 65.2% of plans.

Fifty-seven percent of these plans employ the services of a financial/retirement plan adviser or institutional/investment consultant to specifically assist with plan design decisions, compared to 70.1% of plans in the survey overall. Investment advice is offered to participants in 81.8% of membership organizations/industry associations retirement plans—via financial advisers, a third-party or tools from recordkeepers.

Nearly 45% of membership organizations/industry associations retirement plans indicate they employe a third party as a 3(16) administration fiduciary. Sixty-two percent of these plans have an investment committee, and 79.6% have a written investment policy statement (IPS).

Only three in 10 membership organizations/industry associations retirement plans use automatic enrollment, compare to 48.2% of plans overall. For those that do use automatic enrollment, 80% use target-date funds (TDFs) for the default investment. The most common default deferral rates are 6% (26.7%) and 3% (20%).

Only 29.4% of membership organizations/industry associations retirement plans offer automatic deferral increases (auto escalation).

A profit sharing or other non-matching contribution is offered in 62.5% of membership organizations/industry associations retirement plans, compared to 48.4% of plans overall. A matching contribution is offered in three-quarters of plans, the same as for all plans in the survey. The most common match formula is 51% to 99% of the first 6% of salary, again, the same as for all plans.

The majority of membership organizations/industry associations retirement plans (88.4%) use mutual funds as investment choices in their DC plans, with only 20.9% using separate accounts and only 11.6% using collective investment trusts (CITs). The average number of investment options offered is 21.

One-third (34%) of membership organizations/industry associations retirement plans review investment options quarterly, and 31.9% do so annually. Ninety-three percent say they offer assistance for participants with creating retirement income—via systematic withdrawals, in-plan guaranteed insurance-based products, in-plan managed accounts or managed payout funds or out-of-plan annuity purchase/bidding services.

Two-thirds allow for Roth deferrals, 82.7% allow participants to take loans, and 80.4% allow hardship withdrawals.

PLANSPONSOR 2019 DC Survey industry reports may be purchased by contacting Brian O’Keefe at

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Categories: Industry News

Few Retirees Receiving Income from the Three-Legged Stool

Fri, 2020-01-17 11:47

The National Institute on Retirement Security (NIRS) issued a report examining the sources of retirement income for older Americans—finding that while many Americans rely on Social Security throughout retirement, only some are receiving the benefit.

According to the report, 40% of older American retirees rely only on Social Security income in retirement, while only 6.8% receive income through Social Security, a defined benefit (DB) plan and a defined contribution (DC) plan. The report found roughly the same number of older Americans will receive income from DB plans, as from DC plans. However, this is likely to change, as the American workforce steers away from pensions.

“Future private-sector workers today have less access to defined benefit pensions, and so when they reach retirement age, they’re less likely to have any income from a DB plan,” stated Tyler Bond, NIRS manager of research, in a webinar about the report.

The report also emphasized key demographics and its relationship to retirement income. For example, unmarried older men and women receive retirement income from a combination of Social Security and DB and DC plans, but older unmarried men will consistently have higher incomes than unmarried women, an unsurprising detail considering the ongoing gender pay gap. These two groups tended to have smaller retirement incomes than married men and women, as multiple people in a household receive more income.

Additionally, the report found that both race and educational attainment have strong roles in establishing retirement income. Older white Americans received considerably more in Social Security income and total retirement income—at $23,292 for a median total retirement income figure and $14,760 in median Social Security amount. Older black Americans received a median total retirement income of $16,863 and a median Social Security Income figure of $13,320. Hispanics had the lowest median retirement income at $13,560, and the smallest Social Security income at $12,720—albeit having the highest percentage of those receiving Social Security benefits (45.9%). Almost 40% of white people are receiving these benefits, while 44.8% of black people are.

“The percentage is slightly higher for black people and Hispanics who are only receiving Social Security income in retirement, but you see that the median amounts are much closer together,” said Bond.

The report says those with a college degree will typically have significantly higher retirement incomes than those with only a high school education. “College graduates are more likely to have income from all three sources than those with just some college or those with only a high school education,” explained Bond.

The report also notes how sources of retirement income affect poverty status. For example, people receiving income from DB plans were found to have much greater poverty than those receiving income from DC plans. “One reason for this is that recipients of defined contribution income tend to have significantly higher net worth than recipients of defined benefit income,” said Bond.

The report concludes by stating that Social Security expansion can assist policymakers fighting elder poverty.

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Categories: Industry News

Friday Files – January 17, 2020

Thu, 2020-01-16 13:52

A surprise in the leaf pile, a tiny Irish dancer, and more.

In Mexico City, Mexico, travelers on the Mexico City subway system often blame authorities for broken-down escalators at subway stops, but Metro officials have discovered another explanation. Somehow, urine is penetrating and corroding the drive wheels and mechanisms of the escalators that carry riders up from underground stations. Fermin Ramirez, the system’s assistant manager for rails and facilities, said riders appear to be urinating on escalators at off-peak hours and lightly used stations, “even though it seems hard to believe,” the Associated Press reports.

In London, England, online music giant Spotify launched a podcast for dogs left home alone in Britain, after its polling suggested most owners believe audio recordings help calm their canines. The streaming service has created a “soothing mix” of music, speech and sounds to de-stress dogs home during the day. According to the AFP, the playlists utilize the vocal skills of “Game of Thrones” actor Ralph Ineson and Jessica Raine, the lead actress in the BBC series “Call the Midwife.” The two offer “dog-directed praise, stories, affirmation messages and reassurance”, Spotify said as it unveiled its new “My Dog’s Favourite Podcast” offering.

In Harlan, Iowa, man has asked an Iowa judge to let him engage in a sword fight with his ex-wife and her attorney so he can “rend their souls” from their bodies. The man said in a court filing that his former wife and her attorney had “destroyed (him) legally.” According to the Associated Press, the couple has been embroiled in disputes over custody and visitation issues and property tax payments. The judge had the power to let the parties “resolve our disputes on the field of battle, legally,” the man said, adding in his filing that trial by combat “has never been explicitly banned or restricted as a right in these United States.” He also asked the judge for 12 weeks’ time so he could secure Japanese samurai swords.

A surprise in the leaf pile. If you can’t view the below video, try

Tiny Irish dancer. If you can’t view the below video, try

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Categories: Industry News

Investment Product and Service Launches

Thu, 2020-01-16 13:21
Fidelity Investments Releases Bond Model Suite

Fidelity Investments launched a suite of bond model portfolios for financial advisers—Fidelity Short Multi-Sector Bond Model Portfolio, Fidelity Core Bond Model Portfolio, Fidelity Core Plus Bond Model Portfolio, and Fidelity Dynamic Bond Model Portfolio.

The new model portfolios are designed to maximize risk-adjusted total return as well as accommodate a range of risk preferences, including duration and credit risk.

“Think of model portfolios as a recipe—they can serve as a starting point for advisers but allow for a level of customization based on their clients’ needs,” says Matt Goulet, senior vice president, Fidelity Institutional Asset Management. “We’re excited to offer bond model portfolios with a range of risk profiles for advisers who are looking for strategies that can serve as—or complement—the fixed income allocations in their clients’ portfolios.

Fidelity Short Multi-Sector Bond Model Portfolio is designed to provide a lower duration bond portfolio with a focus on investment grade mutual funds/ETFs complemented by a limited allocation to non-investment grade.

Fidelity Core Bond Model Portfolio is designed to provide a core bond portfolio focused on a diversified allocation to investment grade mutual funds/ETFs.

Fidelity Core Plus Bond Model Portfolio is designed to provide a diversified bond portfolio with a focus on investment grade mutual funds/ETFs complemented by a limited allocation to non-investment grade.

Fidelity Dynamic Bond Model Portfolio is designed to provide a diversified bond portfolio of fixed income mutual funds/ETFs while offering greater investment flexibility through duration and credit allocation.

BlackRock Announces Sustainability as New Standard for Investing

BlackRock will be accelerating efforts to deepen the integration of sustainability into technology, risk management and product choice.

In a client letter, the firm says, “Over the past few years, more and more of our clients have focused on the impact of sustainability on their portfolios. This shift has been driven by an increased understanding of how sustainability-related factors can affect economic growth, asset values, and financial markets as a whole.”

The firm says the most significant of these factors today relates to climate change, not only in terms of the physical risk associated with rising global temperatures, but also transition risk—namely, how the global transition to a low-carbon economy could affect a company’s long-term profitability.

“We believe that sustainability should be our new standard for investing,” BlackRock says.

It announced it is accelerating efforts to deepen the integration of sustainability into technology, risk management and product choice.

This year it will begin to offer sustainable versions of its flagship model portfolios, including its Target Allocation range of models. These models will use environmental, social, and governance (ESG)-optimized index exposures in place of traditional market cap-weighted index exposures. “Over time, we expect these sustainability-focused models to become the flagships themselves,” BlackRock says.

The firm also plans to launch sustainable versions of its asset allocation iShares this year, in order to provide investors with a simple, transparent way to access a sustainable portfolio at good value in a single exchange-traded fund (ETF).

BlackRock is working to develop a sustainable LifePath target-date strategy, which would provide investors with an all-in-one, low-fee, sustainable retirement solution, and it is working to expand its sustainable cash offerings as well.

Other initiatives announced by BlackRock include:

  • Strengthening sustainability integration into the active investment processes
  • Reducing ESG risk in active strategies
  • Exiting thermal coal producers
  • Putting ESG analysis at the heart of Aladdin, its risk management and investment technology platform
  • Enhancing transparency of sustainable characteristics for all products
  • Doubling its offerings of ESG ETFs
  • Simplifying and expanding ESG iShares, including ETFs with a fossil fuel screen
  • Working with index providers to expand and improve the universe of sustainable indexes
  • Expanding sustainable active investment strategies
BlackRock also announced its investment stewardship team is intensifying its focus and engagement with companies on sustainability-related risks.

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Categories: Industry News

Union Pension Funding Crisis Enters a New Decade

Thu, 2020-01-16 12:47

In new commentary shared with PLANSPONSOR, Israel Goldowitz, partner with the Wagner Law Group, says the financial hardship faced by the American Federation of Musicians and Employers’ Pension Fund is characteristic of a broader problem.

As Goldowitz explains, the U.S. Treasury Department has received an application from the American Federation of Musicians and Employers’ Pension Fund to suspend benefits, based on authorities granted under the Multiemployer Pension Reform Act of 2014. The plan’s suspension application is the latest of more than 30 by similar union-run multiemployer plans.

So far, Goldowitz says, the applications have mainly covered workers in transportation and the building trades. But upwards of 120 plans in a number of industries are considered “critical and declining,” he says, which means they are expected to run out of money within 20 years. Such plans, under the 2014 funding reforms, may suspend benefits if that would prevent outright insolvency.

According to a statement from the pension, more than 20,000 musicians could see benefit reductions under the plan. The vast majority face reductions ranging from 0% to 20%, while fewer than 1,000 could see reductions in the range of 20% to 40%. In cases like this, the Treasury must approve or deny the benefit reduction plan after conferring with the U.S. Department of Labor and the Pension Benefit Guaranty Corporation (PBGC)—for which Goldowitz once served as chief counsel. Once approved, the suspension proposal goes to the plan’s participants and beneficiaries for a vote.

While it might seem unlikely that pension beneficiaries would vote in favor of benefit cuts, in fact this has already happened across the U.S. Votes in favor of benefit reductions are cast based on a simple economic analysis: The guaranteed monthly benefit limit that will be paid out by the PBGC (which insures both union and single-employer corporate pensions) is about $36 per month per year of service, or about $13,000 annually with 30 years of service. This amount is far less than the PBGC single-employer guarantee of about $65,000, and it is often also far less than the level of the benefit to be paid after a proposed reduction. And unlike the single-employer guarantee, Goldowitz observes, the multiemployer guarantee is not adjusted for inflation.

“Worse, the PBGC’s multiemployer insurance fund is itself projected to become insolvent no later than 2026,” he warns. “At that point, there will be no backstop for plans that fail or for the 1.3 million people who depend on them. That includes 400,000 people in the Teamsters Central States plan alone.”

Goldowitz says it is no surprise that Congress has picked up on this challenge, given the political influence of unions. However, consensus on a solution remains elusive, even with the lobbying efforts of high-profile politicians and business leaders. Unlike the approach favored by Democrats in the House of Representatives, which would establish a government-backed loan program to assist troubled union pension, the Republican-favored approach in the Senate would permit the partition of such plans and would require accounting reforms.

“Either proposal would involve a cost to taxpayers, with interest groups citing various figures,” Goldowitz says. “Butch Lewis Act proponents [mainly Democrats] point out that retiree spending has a multiplier effect, as most retirement income is spent quickly on goods and services, keeping others at work and generating tax revenues. A compromise may be reached, but we can only speculate when that may happen or what a compromise would look like. These issues should be of concern to companies that participate in multiemployer defined benefit plans, to unions, and to retirees. They should also be of interest to those seeking to lend to or acquire such companies.”

To gauge public awareness and sentiment around multiemployer pension plans and their impending collapse, the Retirement Security Coalition recently commissioned a bipartisan poll among 2,700 likely voters in key states affected by the multiemployer pension crisis. According to the Coalition, the results clearly indicate voter recognition of the pension crisis, as well as the urgent need for Congressional action.

“The survey results show broad voter support for protecting retirees and Congress needing to make changes to multiemployer pension plans,” the Coalition reports. “Voters said overwhelmingly (92%) that protecting American retirees is essential to our economy. The survey found that three-quarters of voters recognize the urgency and need for Congress to take action. Voters support Congress taking action through a comprehensive (70%) ‘shared solution,’ including additional employer support, government assistance and additional retiree support.”

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Categories: Industry News

How to Include Private Equity in DC Plans

Thu, 2020-01-16 12:05

Results of a study by the Defined Contribution Alternatives Association (DCALTA), conducted in collaboration with the Institute for Private Capital (IPC), suggest that including private equity funds in defined contribution (DC) plan portfolios both improves performance and has diversification benefits that lower overall portfolio risk.

The researchers sought to understand the properties of a portfolio strategy that provides an investor exposure to more private funds early in the investment lifecycle but then shifts to increasingly lower-risk and more liquid assets over time. In particular, they simulate the impact of including private market funds into target-date funds (TDFs) that typically have a defined change in asset allocation over several decades.

The analysis found average returns of the TDF portfolio are higher than for the all-public benchmark and the calibrated portfolio outperforms in 82% of the 1,000 simulations. The adjusted standard deviation falls considerably from 9.89% to 8.50%, suggesting that the diversification benefits from adding buyout funds remain substantial. This fall in risk drives the Sharpe ratio up for the calibrated portfolio so that in 100% of simulations, it is higher than for the all-public benchmark. “This is the first evidence we are aware of that an investor can invest their portfolios with private market funds and achieve substantial diversification benefits while at the same time manage dynamic allocation targets within reasonable bounds,” the paper says.

Plan sponsors in the U.S. may have concerns about including private investments in DC plan fund menus, notes Serge Boccassini, head of institutional global product and strategy at Northern Trust Asset Servicing in Chicago. There is a fear that as a fiduciary, plan sponsors worry whether they are making an appropriate decision to include investments that are not necessarily understood. There is concern about the cost of alternative assets and how that plays into participants’ savings accumulation. And, there are concerns about the illiquid nature of some private investments.

Speaking about the results of Northern Trust’s work supporting DC plans in Australia, Boccassini says, “The platforms and processes we use to evaluate [alternative investments] on a daily basis work.”

Including private equity in DC plans

Boccassini explains that when Northern Trust started to grow globally, one of the first places he went was Australia. He realized that the country is No. 1 or No. 2 in terms of leadership in DC plans, with its mandatory “Superannuation Guarantee” contributions program. “Many investments in those plans include assets in illiquid alternatives, such as private equity and real estate,” Boccassini says.

He adds that alternatives are incorporated in the balanced fund—the default fund for superannuation plans. These funds are the typical 60% equity/40% fixed income split, and on the equity side, between 2% and 15% is invested in alternatives. From a liquidity perspective, it works, because buys and sells needed are made with cash and liquid investments other than alternatives.

Boccassini has seen the inclusion of alternative assets result in better rates of return and a better response to challenges when the market slides.

In the U.S., when markets started to flatten and investors, including retirement plans, weren’t getting the same types of returns, many plans went back to a master trust strategy, or one in which multiple plans—defined benefit (DB) or DC—could be combined into one investment trust, and assets could be unitized, according to Boccassini. He explains that if a large plan sponsor has a DB plan with a global equity portfolio that invests in 50 stocks, with 20 in private equity, including venture capital and buyout funds, it can allow its DC plan to invest in that portfolio. For the DC plan, the global equity fund can represent 60% of the plan’s balanced fund. The global equity portfolio is investing both in marketable and nonmarketable securities. The liquidity challenge is addressed because the plan sponsor can sell portions of the fund not invested in illiquid assets when money needs to leave, Boccassini says.

As for the fiduciary concerns, DC plan sponsors can consider that DB plans have a deeper management philosophy and are more broadly based, he adds.

If a plan sponsor only has a DC plan, it would sit down with an asset manager or consultant to create a separately managed balanced fund or a target-date fund (TDF) with assets in private equity. Boccassini says there exists both the technology and processes to peg illiquid assets to the actual trading market through marketable assets and to peg to them to an index. The net asset value (NAV) can be calculated every day, using plus or minus cash flows and what happened in that particular industry.

“What we’re trying to do through research and participating in DCALTA is educate plan sponsors about value versus cost,” Boccassini says. “Some countries have put caps on fees in DC plans, and this limits the use of broad-based investments. The research shows that over time and net of fees, private investments in multi-asset class portfolios perform better, and their risk tolerance is more appropriate in down markets.”

He believes DC plans are missing huge opportunities in the U.S investment market because publicly tradeable securities have been on the decline since the 1980s, and private investments are on the increase. And, from an operating perspective, plans can use private investments in a multi-asset class investment vehicle.

One of the other challenges Boccassini notes is interpretation of the Employee Retirement Income Security Act (ERISA) about what investments can be included in a DC plan. He stresses that nothing in ERISA excludes alternative vehicles. “A number of plan sponsors include private equity or hedge funds in target maturity funds,” he notes.

Boccassini and others in DCALTA have sat down with the U.S. Senate Committee on Health, Education, Labor and Pensions (HELP) to discuss how plan sponsors in other markets are making investments in private equity easier and ways to expand U.S. regulations to include broader assets to alleviate plan sponsor concerns about fiduciary duty.

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Categories: Industry News

Broker/Dealer Rep Accused of Misleading 403(b) Plan Participants

Wed, 2020-01-15 14:02

Broker/dealer Horace Mann Investors Inc. has agreed to provide settlement payments to numerous customers with IRA accounts opened by one of its registered representatives, Delaware Attorney General Kathleen Jennings announced.

According to a press release from Jennings’ office, in 2016, the State of Delaware transitioned its deferred compensation plans from numerous independent 403(b) service providers, including Horace Mann, to a sole provider, Voya Financial.  Related to this transition, more than 120 teachers with 403(b) accounts with Horace Mann opened IRAs in 2016 and 2017 with Horace Mann, through one of its registered representatives, Dieter Hofmann.

The Attorney General’s Investor Protection Unit (IPU) investigated the facts and circumstances relating to the opening of these IRAs. The press release notes that both Horace Mann and Dieter Hofmann cooperated with IPU in connection with its multi-year investigation. IPU alleged and concluded that Hofmann engaged in dishonest and unethical practices in violation of the Delaware Securities Act.

Specifically, IPU alleged that Hofmann took unfair advantage of his customers with 403(b) accounts who were confused about the transition to Voya by providing them with inadequate or inaccurate information which was misleading. IPU also alleged and concluded that Horace Mann failed to sufficiently supervise Hofmann.  

Neither Hofmann nor Horace Mann admitted or denied any wrongdoing. They each agreed to pay a fine of $250,000 and make a $50,000 payment for investor education for Delaware educators. Hofmann is no longer affiliated with Horace Mann and agreed to a one-year suspension from conducting business as a broker/dealer agent or investor adviser representative in Delaware. IPU and Horace Mann agreed that Horace Mann will provide settlement payments for certain customers to compensate those customers for potential lost earnings.

Responding to a request for comment from PLANSPONSOR, Horace Mann said, “The Investor Protection Unit of the Delaware Department of Justice undertook an investigation related to Delaware’s 2016 403(b) transition to a sole provider. In that transition, other providers, including Horace Mann, were no longer able to sell 403(b)s in the public schools in the state. One former Horace Mann representative responded to the change by soliciting existing Horace Mann 403(b) clients to open IRA accounts if they wanted to continue saving for retirement with Horace Mann.

“In the process, this representative engaged in certain activities that the IPU determined violated Delaware law. For example, the representative failed to provide a prospectus to certain investors. This representative is no longer associated with Horace Mann. Horace Mann cooperated fully with the IPU and the investigation, and we determined that it was in the best interest of the Horace Mann, our clients and our representatives to settle this investigation.

“Horace Mann is fully committed to compliance with all applicable laws and regulations, and is disappointed that the conduct of one of our representatives failed to fully meet these expectations.”

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Categories: Industry News

MetLife Offers Digital Enrollment for non-ERISA 403(b)s

Wed, 2020-01-15 11:37

All eligible employees in MetLife administered 403(b) and non-Employee Retirement Income Security Act (ERISA) retirement plans are now able to use EnrollNow—a digital platform accessible from any internet-connected device that makes the retirement plan enrollment process easier, faster and engaging.

With EnrollNow, the enrollment process is efficient and paperless, and participants receive support as they make important decisions such as selecting a deferral amount and choosing funding options.

The company told PLANSPONSOR the offering is free to MetLife plan clients and there is no setup involved. MetLife provides plan sponsors with access to marketing materials to promote the platform to employees. Decision support is provided via digital educational materials, for example, fund fact sheets, that are accessible through links.

“We launched a digital solution to support our customers as they make important plan decisions while meeting the growing demand for alternatives to traditional paper-based applications, says Derrick Kelson, vice president, MetLife Resources. “With EnrollNow, we can deliver an interactive and intuitive digital experience that saves time and costs and delivers an engaging experience for the end-user.”

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Categories: Industry News

HSA Investment Menus Shouldn’t Just Replicate Those of DC Plans

Wed, 2020-01-15 11:32

Investing health savings account (HSA) assets can help participants grow their balances for current and future health care expenses.

Often plan sponsors mirror their defined contribution (DC) plan investment lineup in their HSAs, but a white paper from Devenir, a provider of customized investment solutions for HSAs and the consumer health care market, suggests this may not be the best strategy.

Devenir says it may be advantageous to include more funds in an HSA menu than a DC plan menu due to the wider range of use cases for HSAs, among other factors.

“Simply replicating the typical retirement plan menu is a less compelling strategy for HSAs due to the potentially differing objectives of the end user,” Devenir says. Common objectives providers have when offering investment menus include:

  • Simplification – this results in a limited menu size with core asset classes and an active or passive choice of funds.
  • Minimize costs – this results in an intermediate-sized menu with core and some supplemental asset classes and a passive-oriented choice of funds.
  • Maximize return potential – this results in an expanded investment menu with core and supplemental investment options, and potentially a brokerage window, and an active-oriented choice of funds, as well as target-date funds.

Devenir notes that the case for limiting the number of funds on a menu often stems from research which has shown investors may be overwhelmed by choice, lowering participation rates, or that investors prefer default investment options. However, Devenir says it believes HSAs have the ability to offer a reasonably more sophisticated menu for several reasons: HSA providers do not auto-enroll participants into the investment account, so account holders have to take action to invest, which may lower default utilization; HSA account holders have been shown to exhibit high levels of consumerism (according to Alegeus, consumers enrolled in HSAs are more fluent, engaged, and make savvier health and financial decisions than the general public), meaning HSA investors are potentially more capable of navigating investments; HSAs often do not offer a diversified default investment, as defaults are often set to money market funds (which, however, may still produce a more favorable outcome than leaving balances in cash); and HSAs are less likely to be the first investing experience for participants.

According to Devenir, one of the potential benefits of larger investment menus for HSAs is the appeal to a wider range of investor sophistication and objectives. The range of funds that limits default utilization, minimizes plan costs, and allows investors to build quality portfolios will vary based on a number of factors, including client objectives, financial literacy of the participant population, user experience of technology platform (specifically, how the menu is presented to the account holder), and marketplace demand (investors may be more successful using products they understand), among others.

Recent trends in the marketplace show the relationship between menu size and the number of funds held by investors has generally been positively correlated in HSAs, according to Devenir. Fund line-ups have expanded over time, and investors have nearly tripled their average holdings from 1.5 funds in 2012 to 4.3 funds mid-way through 2019. “The greater average number of holdings suggests investors are taking advantage of the additional investment options and asset classes. Such trends have been shown to lead to higher quality portfolios and outperformance,” the white paper says.

Devenir offers two real-world examples of potential scenarios where investors may benefit from a wider selection of asset classes to choose from. In the first, an investor with recurring qualified expenses as a result of a common medical condition needs a higher level of investment income to cover recurring expenses. Potential optimal asset classes for this investor may include International bond, core-plus bond, high-yield, and equity-income.

In the second example, a young investor with a family history of heart disease and a higher likelihood of lump-sum costs later in life needs to look for additional diversifier asset classes to reduce the risk of not having saved enough for a higher likelihood of acute medical costs. Potential optimal asset classes for this investor may include real estate, emerging markets, international small/mid cap, and international bond.

Regarding the active vs. passive debate, Devenir says passive strategies have largely outperformed higher-fee active managers since 2008, which has made it more difficult for many funds to justify their management fees. However, there is strong evidence to support the idea that the relationship between active and passive outperformance is cyclical. Considering the historically cyclical relationship, the firm believes investors should have an option to avoid a black and white decision between an entirely active or entirely passive portfolio.

Certain areas of the investment menu may be more or less suited to offering either active or passive funds, or a combination of the two. According to Morningstar, active funds have had higher average success rates in asset classes such as real estate, international, domestic small cap, and fixed-income. Morningstar research also points to skilled active fixed-income managers having a higher likelihood of outperforming their passive peers during certain market environments.

According to Devenir, a 6/30/2019 snapshot of the HSA market shows that on an asset weighted basis, HSA investors currently hold more active than passive dollars.

The white paper also says the typical target-date fund glidepath may not adequately represent the less predictable withdrawal patterns in HSAs. However, investors targeting health costs in retirement may find the familiarity and ease of use worthwhile.

But, as an alternative to target-date funds, Devenir suggests investors looking for a simplified approach to investing may be able to utilize objective-based allocation or target-risk funds. Offering an assortment of these funds provides a spectrum of risk levels for investors to choose from. Target-risk funds allow investors to easily align their portfolio risk with their own health or general preferences with a more hands-off approach.

The practices outlined in the white paper stem from observations over Devenir’s 16 years of experience as a consultant, recordkeeper, and researcher in the HSA market. They are intended to help stakeholders benchmark their product offering in the context of the broader marketplace.

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Categories: Industry News

Preventive Maintenance Is Key to Retirement Plan Health

Wed, 2020-01-15 09:51

Preventive maintenance is an essential part of any health routine—even when the patient is a retirement plan.

Periodic checkups can keep plans running smoothly and help plan sponsors identify issues early, before those become difficult and expensive to correct. Such audits come in two varieties—transactional audits and operational audits—both of which are distinct from the annual financial audit required by the Employee Retirement Income Security Act (ERISA). ERISA financial audits are performed by accounting firms to review participant-related transactions and the plan’s investments to support the plan’s annual Form 5500 filing. They are a good starting point for assessing the health of a plan, but they really only scratch the surface.

Transactional audits, by contrast, review benefit estimates, calculations and other plan transactions to ensure they conform to the provisions laid out in the plan document. The objective of a transactional audit is to improve plan accuracy and compliance. In fact, an analysis of the “big-ticket items” that the IRS focuses on in an audit situation is a good starting point for these audits. Examples of these items are loan disbursements, required minimum distributions (RMDs) and the process for finding missing participants. Alternatively, a plan sponsor may determine a set of plan provisions to be reviewed, then select a test population of participants who are affected by those specific provisions. Eligibility, pay definitions, service definitions, benefit formulas, minimum benefits and transfer rules are examples of categories used to pick test cases.

Operational audits are more comprehensive in nature and review administrative processes from start to finish to confirm they follow established operating procedures. The objective of an operational audit is to improve administrative efficiency and enhance the participant experience. Typical areas of focus include:

  • Comparison of plan documents against the requirements in the documents used to program the administration system and against the actual administration system configuration;
  • Review of administrative operations manuals and call center knowledge systems;
  • Analysis of data ownership and data flow from payroll to administration systems;
  • Review of eligibility processes and related data points, including periodic feeds of data from payroll to administration, historical stored data and dynamic age and service calculations;
  • Evaluation of benefit calculations and regulatory limits;
  • Analysis and sample validation of various distribution types as well as reductions, discontinuation and reassignment of payment amounts; and
  • Review of administrative processes required for the financial operation of the plan(s), including check-handling, lump-sum payment protocols, periodic death searches and address change management.

If issues surface during a transactional or operational audit, a thorough and comprehensive root-cause analysis may be an appropriate next step, especially if the failure is severe. This phase requires a deep understanding of the underlying processes as well as the day-to-day activities performed not only by the plan sponsor, but also by payroll systems, carriers, trustees and recordkeepers. The findings of the root-cause analysis will help define the actions required to bring programs and processes in line with plan documents and regulatory requirements.

Given the detailed nature of the work, many plan sponsors opt to engage the services of a third-party consultant that is experienced in conducting these preventive audits. An effective auditor must have the retirement plan experience required to consider particulars such as plan provisions, population characteristics, third-party provider relationships, data quality issues and acquisition/divestiture history.

While it’s not necessary to conduct preventive audits on an annual basis, best practice dictates that they should be completed every three to five years. Issues left undiscovered for longer than that can be extremely difficult—and expensive—to correct. Moreover, periodic audits play a role in ensuring plan sponsors adapt to any changes that may have occurred within the regulatory landscape—e.g., the IRS’ new expanded Self-Correction Program—or within their own environment such as process changes following an acquisition or a change in third-party administrator (TPA).

If it’s been a while since your plan has had a thorough going-over, consider scheduling a “deep clean” as a preventive measure that will help you avoid more extensive plan repairs down the road.


Jay Schmitt, ASA [Associate of the Society of Actuaries], is a principal of Strategic Benefits Advisors, an independent, full-service employee benefits consulting firm that solves benefits issues for clients with 500 to 300,000-plus employees. He has more than 25 years’ experience in benefit plan administration and consulting. He can be reached at

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services (ISS) or its affiliates.

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Categories: Industry News

Supreme Court Remands IBM v. Jander Stock Drop Challenge

Tue, 2020-01-14 14:08

The Supreme Court has ruled in Retirement Plans Committee of IBM v. Larry W. Jander, remanding the case back to the 2nd U.S. Circuit Court of Appeals.

In mid-2019, IBM asked the high court to hear the case after the 2nd Circuit reversed the company’s district court win. Plaintiffs allege that IBM imprudently managed company stock investments in one of its retirement plans, and their lawsuit is a classic example of “stock drop litigation.”

“The question presented in this case concerned what it takes to plausibly allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it,” the decision explains. “It asked whether Dudenhoeffer’s ‘more harm than good’ pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time. In their briefing on the merits, however, the petitioners (fiduciaries of the employee stock ownership plan at issue here) and the Federal Government (presenting the views of the Securities and Exchange Commission as well as the Department of Labor), focused their arguments primarily upon other matters.”

The decision notes the petitioners argued that the Employee Retirement Income Security Act (ERISA) imposes no duty on an employee stock ownership plan fiduciary to act on inside information. For its part, the government argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would conflict at least with objectives of the complex insider trading and corporate disclosure requirements imposed by the federal securities laws.

“The Second Circuit did not address these arguments, and, for that reason, neither shall we,” the Supreme Court rules. “We are a court of review, not of first view. Nevertheless, in light of our statement in Dudenhoeffer that the views of the U. S. Securities and Exchange Commission might well be relevant to discerning the content of ERISA’s duty of prudence in this context … we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance. For this reason we vacate the judgment below and remand the case, leaving it to the Second Circuit whether to determine their merits, taking such action as it deems appropriate.”

The full text of the Supreme Court ruling, including two consenting opinions, is here.

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Categories: Industry News

Portfolios Face Rate Cuts, Trade Tensions and Elections

Tue, 2020-01-14 13:28

Bob Browne, executive vice president and chief investment officer for Northern Trust, introduced the firm’s 2020 market outlook during a roundtable discussion with members of the financial services media.

According to Browne, Northern Trust continues to be moderately overweight risk entering 2020, while the global economy stabilizes after an episode of mid-year weakness in 2019.

“We expect markets to focus on tensions between economic growth and political risks, such as the U.S.-China trade war, Brexit and the 2020 U.S. election,” Browne says.

Echoing its previous projections, Northern Trust anticipates the combination of moderate growth and technological innovation will continue to suppress inflation, which in turn will bolster the global central bank easing cycle that is already well underway.

“This leaves us continuing to favor ‘lower-risk risk assets,’ such as U.S. equities and high yield bonds,” Browne explains. He suggests that central bankers, unable to do anything about inflation, are increasingly willing to serve political agendas to support the global economy. As a result, we are entering 2020 on a new global easing cycle.

Equities and Real Assets

Browne observes that equity markets rebounded strongly in 2019, helped by the Federal Reserve’s policy reversal.

“The Fed cut rates three times, which helped distract investors form the U.S.-China trade dispute and slowing economic growth,” Brown says. “In 2020, we expect companies to return to earnings growth with more global demand from reduced trade tension and easy monetary policy.”

Under this regime, Northern Trust projects the highest returns to be in non-U.S. developed markets, particularly in Europe, though such returns will come with elevated risk. For its part, the U.S. is expected to deliver a solid return with less risk.

In 2019, Northern Trust’s research shows, global real estate and listed infrastructure assets performed well, driven by falling interest rates. Natural resources lagged on slower economic growth and stagnant oil prices.

“This year, we expect continued low interest rates and attractive income to support global real estate and listed infrastructure,” Brown says. “Like last year, we anticipate slow economic growth of approximately 2.5% GDP growth to weigh on natural resources.

Fixed Income and Interest Rates

On the fixed-income side, 2019 bond market returns were strong, benefitting from the combination of falling interest rates and tighter credit spreads. As Browne observes, it paid to take on duration and credit risk in 2019.

“Looking forward, we expect more moderate but positive bond returns, and continued low interest rates, which may fall even more,” Browne says. “Investment grade fixed income will provide a return premium over cash.”

Northern Trust’s analysis posits that the U.S. Federal Reserve is likely to cut rates twice in 2020, which will potentially restore steepness in the yield curve.

“We recommend taking on duration risk in portfolios where appropriate,” Browne says.

The Investor Perspective

Allianz Life Insurance Company of North America also published a 2020 market outlook this week, this one focused more on investors’ expectations rather than the fund manager outlook. The research suggests 43% of Americans are worried a recession is “right around the corner,” down from 50% in Q3 2019. At the same time, 39% of respondents say they are worried about a big market crash “on the horizon,” down from 48% in Q3 2019.

“Interestingly, despite this current sense of calm, the number of people who say now is a good time to invest in the market continues to decrease,” observes Kelly LaVigne, vice president of consumer insights, Allianz Life. “This may be because people are anticipating more volatility in 2020, and don’t want to take the risks that those major swings can have on their savings and retirement.”

According to the Allianz research, nearly one-third of respondents (31%) say putting some money into a financial product that provides a guaranteed stream of income in retirement is the most important step to take to help make sure they have a secure retirement. This is up from 26% last quarter, perhaps reflecting momentum from the passage of the Setting Every Community Up for Retirement Enhancement Act.

Risks from inflation are top of mind, the survey shows. Almost half (49%) of Americans say the rising cost of living is a big risk to their security in retirement, and over one-third (34%) say that inflation may prevent them from ever being able to retire.

“Those with the longest runway toward retirement, Millennials, are most worried about the impact of rising costs, both now and in their future,” the Allianz analysis finds. “They are more likely to say the rising cost of living is preventing them from saving money for retirement as much as they should (62%, compared with 56% of Gen Xers, and 42% of Baby Boomers).”

Millennials are also most worried about being able to pay for necessities like housing or medical care in retirement due to the rising cost of living (50%, compared with 46% of Gen Xers, and 35% of Boomers).

“The rising cost of living is a real threat to hard-earned retirement savings, particularly as people are spending more time in retirement,” LaVigne says. “But less than four in 10 (38%) say they are confident that their financial plan can deal with the rising cost of living. The good news is that a majority of people (60%) recognize having a financial product that offers the opportunity for increasing income can help reduce that risk. Boomers are even more likely to agree, at 63%.”

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Political Discussions Heating Up in the Workplace

Tue, 2020-01-14 13:24

More than half (56%) of working Americans surveyed say politics and the discussion of political issues have become more common in the workplace in the last four years, according to the Society for Human Resource Management’s Politics in the Workplace study.

Nearly two-thirds (65%) say their workplace is inclusive of differing political perspectives, while 33% say their workplace is not. Eleven percent report they have experienced different treatment in the workplace because of their political views, and 12% report they have experienced political affiliation bias. Similar amounts have witnessed these things against others in the workplace.

Forty-two percent of those surveyed say they have experienced political disagreements in the workplace, and 44% have witnessed or observed political disagreements.

According to a Robert Half survey of more than 1,000 workers, 66% of respondents say talking politics at work is more common today than five years ago, but just 22% feel these conversations are appropriate. In addition, 49% of employees are interested when politics come up at work, but more than one-quarter feel uncomfortable or indifferent (27% each), and 19% get irritated.

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Categories: Industry News