Sponsors’ Fiduciary Awareness Deteriorating

Nearly half of sponsors do not think they are fiduciaries, up markedly from 30% in 2011.

Even though all plan sponsors are fiduciaries, 49% do not think they bear this responsibility, AllianceBernstein (AB) found in a survey. This is up from 37% of plan sponsors who said they are not fiduciaries in 2014 and 30% in 2011.

“Plan sponsors now face added responsibilities under the DOL’s [Department of Labor’s] new fiduciary rule, yet they’re less aware of their fiduciary status today than before,” says Jennifer DeLong, head of defined contribution (DC) at AB.

The survey also found that only 39% of the members of investment committees think they are fiduciaries, and the same can be said of 22% of administrative committee members. Even among those who say they are primarily responsible for the plan, 33% say they are not fiduciaries.

Fifty percent of the respondents who have access to a training program say it could be improved, and among the 80% who say their plans document the fiduciary process, 50% say it could be improved.

AB says that one way plan sponsors could improve their fiduciary knowledge and appreciation is by hiring an adviser or consultant. An added benefit of doing so is that advisers boost participation rates, with 49% of plans with an adviser seeing their participation rates rise, compared to 40% of plans without an adviser. Another benefit is an increase in deferrals (57% versus 37%) and improved retirement readiness outlook for participants (22% versus 11%).

Sixty percent of sponsors said they are concerned that participants do not know how much to save, and 54% said participants do not understand their investment options. AB says it is therefore encouraging that 40% of sponsors recently did a re-enrollment, and another 23% are considering doing so within the next two years. By comparison, in 2013, only 10% of sponsors said they would consider a re-enrollment.

Use of target-date funds (TDFs) continues to grow, AB says, particularly among micro plans with less than $1 million in assets, with their usage of TDFs rising from 33% in 2014 to 40% in 2017. Although 40% of sponsors are still using first-generation TDFs, many are moving towards collective investment trusts (CITs).

Forty percent of the sponsors AB surveyed offer financial wellness programs and say they have found they make their employees more productive and focused.

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Assessing U.S. Retirement Allocations in a Global Context

A panel of MFS investment strategists and economists look back over 2017—and ahead to the global growth challenges and opportunities for the coming year.

During a year-end investing outlook webcast hosted by MFS Investment Management, James Swanson, chief investment strategist, and Erik Weisman, chief economist, highlighted stronger global growth and “merely moribund” inflation as important tail winds for U.S. retirement savers.

Of course, they also pointed to global macroeconomic concerns—fitting squarely in the camp that view the economic rise of China increasingly as a concern for the performance of developed Western economies.  

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The MFS data show that relative global growth trends have held steady since 2012: Developed economies have hovered between 0.5% and 2% gross domestic product (GDP) growth while emerging economies have ranged between 3.5% and 5% over that time. Interestingly, manufacturing performance indicators have been more even across global and developed economies—in fact, developed economies have turned in higher manufacturing performance index levels since roughly 2013.

According to the MFS experts, “Global inflation is still missing in action.” Inflation in the U.S. since 2015 has remained very close to the Federal Reserve’s 2% target, while inflation in the Eurozone has hovered around 1%. MFS pins inflation in China around 0% to 0.5% for this time period, while Japan has slipped in 2017 toward and even below 0% inflation.

Swanson and Weisman presented evidence to the effect that improved growth this year has come on the back of better industrial production and better trade. Moving to the all-important question of whether economic fundamentals align with current market pricing, they suggest there are some reasons for valuation concern. Right now the Standard & Poor’s (S&P) 500 is trading around 18 times the price-to-next-12-months’-earnings ratios, compared with an average of 14.4 times. European indexes similarly are trading some distance above the long-term average. Emerging markets and Japan, on the other hand, are trading right in the ballpark of their long-term averages.

The increasing “narrowness” of the sources of return in broad market indexes is also concerning to the MFS experts. Looking at the returns from the top 50 companies by market capitalization in the S&P 500, one sees that just the top 10% of companies by market cap represent a whopping 56% of total returns. In Europe, the issue is equally apparent: The top 5% of the MSCI EAFE index returned 32% of the total return so far this year.

According to Swanson and Weisman, high merger and acquisition activity tied to margin borrowing indicate the impressively long-lived bull market may be reaching the end of its cycle. However, other signs are cause for optimism about an even longer growth streak—for example, the percent total of U.S. households that are delinquent on credit card balances, which peaked at nearly 14% in 2009, has since dropped to 6%.

On the fixed-income side, MFS clients are increasingly asking questions about how to address the flattening yield curve, the experts noted. This will not be easy, but there are possible options for potentially boosting returns, such as laddering the portfolio.

The pair concluded that the markets in 2018 will be driven by four themes: even more concentrated markets; growth over profits; questions about the conventional efficient investment thesis; and evolving convictions about growth vs. value investments.

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