Mercer Launches Pension Buyout Index

Mercer launched the Mercer U.S. Pension Buyout Index, featuring monthly average pricing information from independent third-party insurers.

The index is designed to help pension plan sponsors evaluate the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit (DB) pension plan. It allows plan sponsors to see how the approximate current cost of the purchase of annuities changes over time and to evaluate the cost of a buyout against the administrative costs, Pension Benefit Guaranty Corporation (PBGC) premiums and risks of holding pension fund liabilities for retirees.  

The index shows the estimated buyout cost for “Retirees Only” transfers on a monthly basis for a 12-month period beginning December 31, 2011. Pricing does vary over time, affected not only by interest rate movements, but also by insurance companies’ capacity and desire to take on additional liabilities.   

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“There are times when it’s cheaper to annuitize. But to act, plan sponsors need to understand how real-world pricing can change from month to month”, said Leah Evans, a principal in Mercer’s Financial Strategy Group.“The Mercer U.S. Pension Buyout Index will help plan sponsors understand cost trade-offs of a buyout versus the administrative expenses, PBGC premiums and risk factors of holding pension liabilities on their own books. When these factors are taken into account, annuitization may be attractive. Indeed, in some situations, the cost to buyout these liabilities through annuities may actually be lower than the accounting liability plus capitalized expenses. The reward may be a significant reduction in balance sheet risk. We think this tool will be a valuable resource to plan sponsors as they consider whether the buyout option is right for them and gauge the timing of such a transaction.”  

The Mercer U.S. Pension Buyout Index may be accessed at www.mercer.com/US-pension-buyout-index.

401(k) Plan Fees Declining

Retirement plan costs have declined over the past year, according to figures from the 401k Averages Book.  

The average total plan cost for a small retirement plan (50 participants/$2,500,000 assets) declined from 1.47% to 1.46% over the past year, while the average total plan cost for a large retirement plan (1,000 participants/$50,000,000 assets) declined from 1.08% to 1.03% over the past year, according to the 13th edition of the 401k Averages Book.

The study shows the small plan average investment expense went from 1.38% to 1.37%, while the large plan average investment expense declined from 1.05% to 1.00%. The term “investment expense,” for the purposes of the book, represents any asset based charges applied to plan assets. To the extent that investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and adviser fees or any other asset based charges are a part of a particular product in the database, they are included in the “investment expense” of that product. Thus, by extension the average “investment expense” calculation includes all of the above charges, Joseph Valletta, co-author of the 401k Averages Book, told PLANADVISER.

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The average total expense for a small plan is 1.46%, but the range between the high and low total plan expense is .38% to 1.97%.

“401(k) fees have been trending down over the years but the Department of Labor's fee disclosure regulations helped bring a great deal of attention to 401(k) plan fees,” Valletta said. “More plan sponsors and their advisers recognize the importance of plan fees and the wide range of fees in the marketplace.”

This edition of the 401k Averages Book separates target-date funds (TDFs) from traditional balanced and risk-based funds. “Since target-date fund usage continues to grow in 401(k) plans, we thought it was important to calculate the average cost of target-date funds available within 401(k) offerings," said David Huntley, co-author of the 401k Averages Book.

The study found that the average TDF expense for a large plan is .98%, while the balanced fund average is 1.12%. The average TDF expense for a small plan is 1.37%, while the balanced fund average is 1.45%.

More information about the methodology behind the 401(k) Averages Book can be found here. The 13th edition is available at http://www.401ksource.com.

 

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