TDFs Attract Majority of DC Assets

During the third quarter, Callan DC Index balances improved by more than 4%, mostly because of market appreciation.

Defined contribution (DC) plans (4.40%) nearly matched corporate defined benefit plans (4.45%) during the third quarter. However, DC plans trailed the typical 2030 target-date fund (TDF), which posted a front-running 5.34% gain for the quarter.  

TDFs managed to attract the majority of assets, as they have every quarter since 2006. Nearly 70 cents of every dollar that flowed into Index asset classes during the third quarter went to TDFs. This flow data reflects participant and plan sponsor contributions, withdrawals, transfer activity and any changes in the fund or asset class lineup (i.e. fund mappings).  

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Several DC investments saw net outflows, with domestic (large and small/mid cap) equities, global equities, and company stock witnessing a material exodus during the quarter. The beneficiaries of the outflows were primarily TDFs and domestic fixed income. Taking all the flows into account, turnover—which reflects net transfer activity levels in the DC Index—more than doubled from a quarter ago, coming in at 1.04% (about 40% higher than typical levels).

Traditional inflation-sensitive asset classes such as real estate investment trusts (REITs) and Real Return/Treasury inflation-protected securities (TIPS) funds saw modest inflows. Stable value funds endured a second consecutive quarter of net outflows, despite offering a premium return to money market funds, which experienced positive flows.  

Domestic large cap retains the biggest share of participant assets in the Index (24.2%). This asset class also has the distinction of having experienced quarterly net outflows more often than any other major asset class outside of company stock, with net outflows occurring nearly two-thirds of the time since 2006. Accordingly, large cap stock has declined as a proportion of the Index from 32% six years ago to just below 25% today. In contrast, TDFs have grown to represent 15.5% of overall Index assets (or more than 20% of assets in plans where they are available). Overall equity assets stand at 63.5%, which is down nearly 2 percentage points from a year ago.  

More information is at http://www.callan.com/research/dcindex/.

Designing an Effective Retirement Program

There is a long-term cost for employers for not helping employees prepare for retirement, said Matt Iverson, director of Boulevard R.

 

During a webinar sponsored by Retiremap and Retirement Playbook Inc., Iverson noted that if employers do nothing, lingering employees will increase employer health care costs, and they are paid higher salaries. An employer can receive a return on investment of three to one with a financial wellness program, according to data from the Personal Finance Employee Education Foundation (PFEEF), added Trisha Brambley, partner at Retirement Playbook Inc. Helping employees feel financially secure also improves employee engagement and productivity and therefore can improve a company’s operating income (see PLANSPONSOR April 2012 Feature: The Task at Hand”).   

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Iverson said a retirement readiness program should use behavioral economics to nudge employees to save more; be a measurable, holistic program; and affordably deploy today’s technology to engage employees and boost enrollment. Employers should adopt a financial wellness program that does not just address retirement readiness, contended Brambley, adding that financial stress tops the list of sources of anxiety for employees, and stress is linked to physical wellness.  

Again citing data from PFEEF, Brambley said the most common behavioral changes in participants in financial wellness programs are that they reviewed the allocation of their assets, reduced their expenses, used more online financial tools, reduced credit card debt and increased deferrals to their retirement plans. Ninety-nine percent of those who participated in a financial wellness program say the program is an important employee benefit, 98% say they are better prepared to make financial decisions, and most say they will create a budget and save more for retirement as a result of the program.

 

 

(Cont’d…)

According to Iverson, education should engage employees around their goals. However, retirement is not the best hook; instead of giving them a total savings need, ask what they would like to do in retirement and show them how much of that they will be able to do with what they are saving. In addition, Iverson noted, many employees are thinking more about shorter-term savings needs, such as saving to buy a home or saving for their children’s college educations. The information should show how those priorities will affect savings for retirement; education should address overall financial success, he said.  

Iverson suggested employers should not show employees a dollar amount for what they will need in retirement because that can be very discouraging (see “The Bottom Line: Future Shock”). Instead, education programs should show employees how what they save monthly accrues over time.  

Iverson pointed out that traditional education methods—using brochures, provider tools and group presentations—have shown little impact on employees’ savings behavior. Brambley said the program should have multiple components—one-on-one meetings, mailings and online tools—and employers should use incentives or raffles to get employees to participate or make attendance mandatory. Iverson’s firm created Retiremap (www.retiremaphq.com), which features an online component using email activation links but also comes as an iPad application, used in 30-minute onsite workshops. (See “Retiremap Plan Education Tool Launched.”) Iverson said employers can create a keynote presentation and link it to a provider’s site, download the keynote to iPads and set up iPad kiosks for employees to use. 

Employers should measure the success of their education program to optimize content and know what topics to cover, Iverson concluded.  A video recording of the webinar is available here.

Brambley said Retirement Playbook sells a guide to implementing a financial wellness program. More information is at www.rplaybook.com.

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