The Markets June 26, 2014

Dietrich Urges DB Plans to Consider De-Risking Actions

The relative attractiveness of annuitizing pension liabilities fell for the second month in a row, according to Dietrich & Associates, Inc.’s Pension Risk Transfer Index.
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As of June 1, the index moved to 90.32, down almost two points from May. The annuity discount rate proxy lost a little ground (3%). The index’s change is due in most part to continued erosion in defined benefit (DB) pension plan funding levels as a result of low interest rates.

“Early movers have been the big winners so far in 2014 and I see this continuing to be the case,” says Geoff Dietrich, vice president of Dietrich & Associates, Inc., based in Plymouth Meeting, Pennsylvania. Popular opinion remains that interest rates cannot go any lower, he says, but they continue to disappoint.

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In a time of strong equity markets and higher fixed income returns, DB plan liabilities continue to increase, adds Dietrich. The cost of operating a DB plan also continues to increase, not to mention the cost of doing nothing. Dietrich cautions that DB plan sponsors need to be aware of the “liability-centric” de-risking options available and that these options are not one-size-fits-all.

“Passive management is not the answer,” says Dietrich. “In today’s marketplace, there are numerous tools to help sponsors mitigate risk, volatility and expense. Plans should continue to vet and implement these options.”

The Pension Risk Transfer Index was designed to provide pension stakeholders with a mechanism for monitoring settlement market conditions, and to support effective plan governance and decisionmaking.

The index results for May can be found here. A video with additional commentary can be found here.

Data & Research June 26, 2014

Workers Are Redefining Retirement

Half of defined contribution (DC) participants plan to work in retirement, according to State Street Global Advisors (SSgA).
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A more mature workforce will present a challenge to employers and inevitably prompt them to be more proactive about helping their employees to be better prepared for retirement, according to State Street Global Advisors (SSgA).

“There has been a major shift in the past 10 to 15 years, and retirement plan participants are expecting to continue to earn in their retirement years,” says Fredrik Axsater, global head of defined contribution at SSgA. “The desire to continue working is not restricted by gender, age, savings, current income or education. This signals a big change in attitude toward retirement and is indicative of the survey results showing that 40% of participants anticipate working well past retirement age because they want to work, not because they have to work.” Overall, a full 50% expect to work past retirement age, the survey found.

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The majority of participants (65%) expect to maintain their current lifestyle in retirement, and 64% of those between the ages of 50 and 75 wished they had started saving earlier, the survey also found. Among all participants, 80% would advise their younger selves to begin saving earlier.Plan sponsors can be more hands-on about helping their workforce save adequately for retirement, Axsater says. “Conversations about lifestyle and influencing habits at an earlier point in an individual’s career can have a major impact on retirement preparedness.”

SSgA recommends that plan sponsors keep three points in mind as they work to help their participants effectively prepare for retirement:

First, focus on younger participants, who have a long time horizon for setting aside money for retirement. Second, automatically enroll participants into a well-diversified portfolio and escalate their deferral rates. While sponsors may be hesitant to take charge for their employees, SSgA participant surveys have shown that participants actually appreciate their employer taking these steps for them. Third, offer a holistic financial wellness program to employees. This becomes increasingly important, SSgA says, since a survey in January found that 49% of participants were looking to move to more conservative investments, and only one third work with a financial adviser. The program should include targeted communications, SSgA says.

State Street Global Advisors (SSgA) collected data using a 10-minute online survey of 980 verified 401(k), 403(b), 457 and profit-sharing plan participants and retirees, ages 30 and older.

The survey can be downloaded here. 

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