The Markets June 5, 2015

PSNC 2015: DB Plan Investing

Liability-driven investing is still the game for many defined benefit plans, and equity investments can still play a role.
Reported by

Equity market risk and interest rate risk are the biggest risk factors for defined benefit (DB) plan investing today, according to Phil Kivarkis, U.S. director of Investment Policy Services at Aon Hewitt.

“DB plans are subject to mark-to-market accounting, so plan sponsors need to be liability aware,” he told attendees of the 2015 PLANSPONSOR National Conference. “Take the risks you will be rewarded for and get rid of the ones you won’t,” he suggested.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Kivarkis said plan sponsors may hedge interest rate risk with long-term fixed income vehicles, aligning assets with liabilities. It may also make sense to use return seeking assets, but they should be well-diversified and not overly exposed to any one equity market.

Liability-driven investing (LDI) is still being used by many plan sponsors, and the LDI conversations are still about interest rates, said Phyllis E. Klein, senior director of the Consulting Research Group at CAPTRUST Financial Advisors. “They are still expecting rates to go up, talking about the bets they are making on interest rates, how rising rates will affect liabilities, and what they can do with assets to handle that effect.”

Rocke D. Blair, practice leader for the Cincinnati market at White Oak Advisors, added that DB plan sponsors that freeze their plans pursue LDI to try to control the volatility of funding and contributions, and control for interest rate risk, but active plans also do this.

NEXT: Using equity investments to boost funded status.

One way to boost funding is through equity investments, but Blair suggested plan sponsors use different types of equity that are not highly correlated to each other. He said plan sponsors, historically, think about using small- and large-cap and international equities, but most are highly correlated with respect to market movement, so emerging markets equities and alternative investments make sense.

Kivarkis noted that the Highway and Transportation Funding Act of 2014 (HATFA) effectively pushed out DB plan funding requirements three years, so that gives the market more time to do some of the heavy lifting for plans. But, plan sponsors need to manage their expectations. “I think returns will be moderate, and interest rates will move up, but slowly,” he said. “Funded status will move up, but DB sponsors will need to get out their checkbooks for the next few years.”

Smart beta is a new trend in DB plan investing, in which investors try to get better returns and a more balanced equity portfolio by focusing on factors other than market capitalization when choosing which companies in which to invest, Kivarkis noted. But, he said the next step should be an extension to alternative investments. “We think they make sense,” he said. “They enhance returns and have a low correlation to equities.”

Blair believes smart beta will replace hedge funds. But, he warned that it is just another tool in the DB investor’s toolbox and not a total solution to managing funded status.

Despite the withdrawal of DB plans from the employer-sponsored retirement plan landscape, it is still a market worth several trillions of dollars, Kivarkis noted. “If there’s a demand for a solution, someone will come up with it,” he said. “At some point there will be a move to efficient assets, and that will demand long-duration solutions.”

Client Service June 5, 2015

PSNC 2015: The Evolution of Education

Education is moving toward the value of saving, the importance of starting early and financial wellness.
Reported by

The evolution of retirement plan participant education is happening because providers have better tools to engage participants, and technology makes it easier to get information about participant behaviors and outcomes, Joe Connell, director of Retirement Plan Services at Sikich Retirement Plan Services (Formerly Retirement Plan Partners), told attendees of the 2015 PLANSPONSOR National Conference in Chicago.

Sean M. Ciemiewicz, a principal at Retirement Benefits Group, added that more plan sponsors are offering tools to get participants to take immediate action at meetings, rather than go back to their desk and think about it.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The first hurdle is getting participants’ attention, said Michelle Barrett, manager of University Retirement Programs at the University of Rochester, a 2015 PLANSPONSOR Plan Sponsor of the Year finalist in the 403(b) category. She shared how the university uses gaming to get participants involved in learning. The “What’s Your Financial IQ?” game sends participants a block of questions each day, and they can measure how their answers compare to their peers’. For the “Square Up Your Savings Challenge,” participants were given tasks to complete, such as watching a financial education video, and for each task completed, they received a square on a map of the university. Ten winners were chosen from the squares on the map to receive a prize.

Connell noted he likes the idea of using incentives to get people to engage, much like incentives are used with health care wellness programs.

Richard Hartman, corporate benefits manager – Retirement Plans at American Woodmark Corporation, a 2014 PLANSPONSOR Plan Sponsor of the Year finalist in the Corporate 401(k) – $50MM to $1B category, said data can also get participants’ attention. American Woodmark’s third-party administrator (TPA) uses participant data it has in its system for a modeling tool called My Forecast. It shows participant their target savings and where they are in reaching that target. “Sometimes showing them this gap encourages them to engage more,” he said.

NEXT: Developing your message.

 

Connell pointed out to attendees that nearly everyone had no financial education in school, so plan sponsors have to start at the beginning with their message to participants. And, he suggested, plan sponsors can provide education in little snippets so participants do not get overwhelmed.

Hartman said his firm used to do typical messaging about enrolling in the plan and asset allocation, but when they moved to automatic enrollment, automatic deferral escalation and automatic investment allocation vehicles, that provided the opportunity to broaden the message to financial wellness. Some of his employees do not even have a checking account, and most do not have a savings account other than the retirement plan, so they need basic messaging about establishing a “rainy day” fund. “We talk about things that are current for them,” he said.

Ciemiewicz added that plan sponsors need to make the message fun. “If you just have someone stand before participants and talk about budgeting, people will tune out,” he said. “Plan sponsors need to make messages visual as well as auditory.” He suggested attendees check out the YouTube video “Blind and Outnumbered” and share it with employees.

Connell noted that participants do not get a lot of positive messages, and seeing recommended savings rates or targets can overwhelm them. Rather than using industry data or stats from the media, he suggested that plan sponsors use the numbers from their own plan to encourage participants. For example, a 5% average contribution rate is not outstanding, but telling participants that the average contribution rate in the plan is 5% of pay will encourage those saving below that level to bump up their rate or begin to save.

NEXT: Targeted messaging and measuring results.

 

According to Barrett, the University of Rochester has developed different messages for different groups of employees. Each year, the university holds a half-day seminar for employees age 50 and older, and a guest, with someone from the Social Security Administration (SSA), insurance providers and retirement plan providers to help employees with retirement planning. The university also has a Women-to-Women education series presented by women for women.

Connell added that Generation X (ages 35 to 50) is another good audience to target because they have many financial responsibilities tugging at them during this time in their lives. Ciemiewicz said brand new employees are also underserved. “They are focused on learning the job and making a good impression, and are often handed a packet of information with paperwork to sign,” he noted. He said plan sponsors should get employees engaged with financial education from Day One.

“Don’t be afraid to try new things,” Connell encouraged attendees. “If no one shows up, that’s OK, you can adjust your strategy.”

How do plan sponsors know if all of their education efforts are working? Hartman said his firm used the 90-10-90 metric from the book “Save More Tomorrow,” by Shlomo Benartzi— a goal of 90% of eligible employees contributing to the plan, a 10% average deferral rate by participants and 90% of participants using some type of advice for their investment decisions. He said American Woodmark is working on measuring participants’ retirement readiness.

Ciemiewicz noted that retirement readiness is not the same for every employee. For example, someone who lives in Tennessee may not need as much income in retirement as someone who lives in New York. Using the same retirement readiness goal could discourage some participants. He suggested plan sponsors keep other factors in mind to get employees to reasonable goals.

Providers are very important to measuring success of education efforts, Connell said. “They have the data, but make sure they give it to you in meaningful ways,” he said. He added that traditional metrics such as participation rate and deferral rate are still good measures of success.

«