Pension Relief Bill Presents Risks (from Plan Adviser)
July 06, 2012 — New pension rules may provide relief for underfunded pension plans, but they can also increase risk, according to Karin Franceries of J.P. Morgan Asset Management. —
“Most people hope that interest rates will go up so the value of liabilities goes down,” Franceries, an executive director in J.P. Morgan Asset Management’s Strategy Group, told PLANADVISER. “But with the funding relief, the discount rate is so smoothed over 25 years that the liability value is known over the next three years. Liabilities will not be sensitive to rates any more. This could raise a question if you are in fixed-income investments: if rates go up, your fixed-income investments will lose in value, but your liabilities will not move at all.”
That means plan sponsors might have to increase contributions when they could have decreased them had their liabilities been timely marked to market. But the new law could cloud sponsors’ judgment, tempting them to choose very short fixed-income investments to remove interest rate risk, a move Franceries strongly discourages.
Franceries said a pension fund that appears to be 100% funded because of the new regulations but is actually 80% funded might say, “ ‘Let me switch all my assets to cash. I won’t lose money with cash.’ ” Franceries disagrees. “The assets will not appreciate in value. Your deficit could stay constant or even increase once the effects of the new bill disappear in a few years,” she stated.
The bill presents a problem in the case of decreasing interest rates. Sponsors can now calculate their liabilities based on benchmark bond rates for the 25-year-preceding period. Because interest rates were much higher before the 2008 financial crisis, the use of higher interest rates lowers pension liability calculations. (See “Despite Funding Relief, DB Contributions May Stay Above Minimum.”)
New rules shine a light on fees in 401(k)s (from Wall Street Journal)
Under new rules from the Department of Labor, providers of 401(k)s and related savings plans are now required to give you information that, ideally, will help you analyze and reduce the cost of maintaining your account and building a nest egg. In the coming months, the 72 million Americans with a total of $3 trillion in self-directed retirement plans will see, among other specifics, in quarterly and annual statements:
•Detailed information about fees and expenses, for the savings plan itself and for individual investments.
•Simplified displays about investment options and comparisons of returns, as well as benchmark data.
•Places online where participants can find additional information about their plans and investment options.
Although some employers and providers of retirement plans already include some or all of this information, the disclosures weren’t required in the past. The goal of the new rule is to improve transparency and enable apples-to-apples comparisons of different plans and investment choices.
Why the changes? Full disclosure of what your 401(k) is costing you should lead to more competition and lower costs in the marketplace.
“The new fee-disclosure initiatives will put an increased focus on overall plan fees at the employer level,” says Dave Gray, vice president of client experience for Schwab Retirement Plan Services, Richfield, Ohio. “This may lead employers to seek lower-cost solutions for their plans.”
Fees, of course, can wreak havoc with a nest egg. An example provided by the Department of Labor illustrates the point. Assume you are 30 years old and have an account balance of $25,000. Further assume that this investment earns 7% annually for the next 35 years and your expenses reduce those returns by 0.5% each year. With no additional contributions, your account would grow to $227,000. However, if the expense rate were raised by just one point, to 1.5%, the balance at the end of the same period would be only $163,000.
Since your employer controls the plans available to you, your ability to influence expense ratios directly is limited. Still, armed with the information provided under the new rules, employees can ask questions and voice their opinions and recommendations about costs and performance.
If you see that the fees associated with a particular equity fund in your holdings are excessive, you might consider switching to a different fund.
That said, remember that the information available under the new rules is just one part of your retirement equation.
“It’s important that people don’t just focus on the cost of investments and make choices only on that basis,” says Mr. Gray. “They need to understand the importance of proper asset allocation and the value they can elicit from their plan in terms of matching contributions and professional advice, which most plans offer.”
Paper Addresses How to Improve Retirement Plan Enrollment (from Plan Adviser)
July 09, 2012 — Diversified has released a white paper about improving retirement plan enrollment. —
“10-Minute Enrollment: Scaling Back Meeting Content to Drive Higher Enrollment Rates” focuses on how simplifying the retirement savings plan enrollment process can help increase participation rates.
Traditional enrollment meetings are typically scheduled in 45- to 60-minute blocks, with time allotted to suitably review an employer’s retirement savings plan, including eligibility rules, employer match formulas, loan availability—even distribution options. During this comprehensive review of plan benefits, enrollment can become a secondary focus, and as a result, the objective of enrolling employees is not always achieved, Diversified contends.
“We’ve witnessed firsthand the higher success rates that occur when enrollment meetings are shortened to 10 minutes—focused only on why employees should be in the plan, not on a comprehensive review of plan benefits,” ” said Patricia Advaney, senior vice president, participant solutions at Diversified, and the author of the white paper. “Subsequent targeted communications can address the retirement savings needs of specific employee segments, and are most effective when they get the right message to the right person at the right time.”
Wide Variance in Target Date Funds (from Wall Street Journal)
In 10 years, target-date funds may represent half of all the money in 401(k) plans and other defined-contribution retirement plans, according to consultants Casey, Quirk & Associates. But there isn’t agreement in the mutual-fund industry on key features of these all-in-one portfolios—including the appropriate levels of stock exposure and whether to include “alternative” assets such as commodities.
Those variations help explain the big range in returns between the best and worst performers for various time periods, as seen below.
For a detailed look at the still-evolving world of target-date funds, see The Wall Street Journal’s quarterly Investing in Funds report tomorrow, July 9—available free to everyone online, at WSJ.com/FundsAnalysis.