In Practice March 7, 2007

Automatic Plans No Silver Bullet

The future of retirement plans may lie in automated savings arrangements, but that can’t be the only means of improving participation and employee engagement.
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These were the sentiments of panelists speaking about the future of defined contribution plans and their role in framing adequate retirement savings at the Securities Industry and Financial Markets Association (SIFMA) Savings and Retirement Symposium in Washington, DC last week.
Forty percent of Americans still don’t have access to a retirement plan, so one industry goal needs to be increasing access to a retirement plan, commented Laura Grogan-O’Mara, Vice President, Regulatory and Legislative Initiatives at Merrill Lynch. Smaller employers employ more people, she said, but only 47% of companies with 1-99 employees offer a retirement plan.
Even when there is a plan available, participation is still lacking; at Fidelity, 36% of participants don’t participate in the plan because of inertia, fear, or a lack of financial literacy, according to Stephen Setterlund, Vice President, Retirement Services Marketing at Fidelity Employer Services Company.
Need for Accumulation
Over half of the population will be relying on Social Security for 90% or more of their income Grogan-O’Mara said. In 2003, based on government statistics, the median balance of employer-sponsored, defined contribution accounts, not including IRAs, held by people aged 45 to 64 was just $23,000. Based on that statistic, Karen Friedman, Director, Conversation on Coverage and Policy Director at the Pension Rights Center, said she doesn’t think that anyone can disagree that automated savings arrangements will help in asset accumulation.
“Everybody needs to be in and saving more,” Setterlund said, suggesting that every participant should be moved into an increased savings arrangement. Although it is good news that account balances are moving up, the folks that are really doing well are masking the problem, which is the median account balance, he said.
In Setterlund’s opinion, “we’ve got to get people saving 10% or more per year.” Plan administrators shouldn’t be fearful about setting the automated deferral rate too high, he said. If participants are not happy with it, they might revise their savings rate lower, but they won’t opt out of the plan because they know they should be saving. Only 8% of participants in plans recordkept by Fidelity maximize their plan contributions.
Less Abstract
It is important that the industry take planning out of the abstract for plan participants, Setterlund agreed. People need to understand what they have and how that compares to what they will need for the rest of their life, he explained. When amassing a large sum of money, it doesn’t translate into what type of income it will provide, so people should contemplate their needs ahead of time and determine what their savings will need to be for a particular retirement income figure.
The industry talks about getting people to accumulate adequate savings, Friedman said, “but what is an adequacy measure” she asked, suggesting the industry still has to figure that out.
The Markets March 6, 2007

ETF Assets Reached $431B in February

Exchange traded funds (ETFs) grew by about 2.1% in February to $431 billion, according to a new report from State Street Global Advisors (SSgA).
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U.S.-listed ETF assets rose by approximately $9 billion in February. Specialty, size, and style-based ETFs experienced considerable asset growth, respectively gaining $2 billion, $2 billion, and $1 billion in February, according to the SSgA data.

According to State Street, as of February 28, 2007, 432 ETFs in the U.S. were managed by 15 ETF managers. The top three managers in the U.S. ETF marketplace were Barclays Global Investors (BGI), State Street and Bank of New York. Collectively, they account for approximately 90% of the U.S.-listed ETF market.

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Some 45 new ETFs were kicked off during the month accounting for approximately $800 million in assets. Those included, according to State Street:

  • ProShares launching 34,
  • Wisdomtree launching six,
  • Powershares launching two,
  • First Trust launching two; and
  • Rydex launching one.

Notably, all asset-class groupings of ETFs experienced positive growth for the month, SSgA said. In terms of managers, BGI has the largest AUM with $254 billion in 128 ETFs, followed by State Street with close to $100 billion in 45 ETFs.

In February, the average daily volume for all U.S.-listed ETFs was $32 billion, which represents roughly 7% of the total value of the U.S. ETF market.

The top three U.S. ETFs in terms of dollar volume traded for the month were the S&P 500 SPDR, NASDAQ-100 Index Tracking Stock, and the iShares Russell 2000 Index Fund.

The SSgA report also indicated that, during February:

  • Size-based ETFs saw assets grow by close to $2 billion. The iShares Russell 2000 ETF added over $2 billion for the month alone.
  • Style-based ETFs added close to $1 billion.
  • Sector-based ETFs increased by nearly $500 million.
  • International ETFs grew by approximately $1 billion.
  • Fixed Income ETFs added just over $500 million.
  • Specialty ETFs increased approximately $2.1 billion.
  • Commodity ETFs grew by close to $800 million.

In terms of style, growth-oriented ETFs outpaced their value counterparts, though both added significant assets.

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