Newsdash Insight on Plan Design & Investment Strategy from PLANSPONSOR
April 10th, 2014
Benefit Briefs
What 401(k)s Can Learn from 403(b)s
The passage of 403(b) regulations in 2007 led 403(b) plans to adopt requirements and administration practices similar to those of 401(k)s. However, as the corporate retirement plan landscape is shifting and new trends are emerging in 401(k) plans, those plan sponsors are looking to 403(b)s for insight. For one thing, notes Tim Walsh, managing director for Institutional Investment Product at TIAA-CREF in Boston, many nonprofit organizations have never offered a defined benefit plan to employees, and 403(b)s have been the primary retirement savings benefit offered. “Sponsors of 401(k)s  are recognizing that 403(b)s have always been the core plan for those entities that offer them, so now that 401(k)s are the core plan for the corporate sector, they are looking to 403(b)s for best practices,” Walsh tells PLANSPONSOR. “We get questions all the time, especially from consulting firms that work with 401(k)s and want to build their 403(b) business, about how 403(b)s are different, especially when it comes to lifetime income, and what are 403(b) best practices,” he adds.
When it comes to executive retirement arrangements, a recent study reveals a continued emphasis by U.S. companies on elective deferred compensation. Towers Watson finds that such arrangements allow executives to control the timing of the taxation of incentive payouts and are therefore seen as a critical component of the overall executive wealth accumulation opportunity. The study of executive retirement benefit practices during 2013, “Executive Retirement Benefits: Recent Actions and Design Considerations,” finds although the percentage of U.S. employers that sponsor non-qualified defined benefit retirement plans (NQDBs) continues to decline, most of the organizations queried for the study (71%) continue to provide some type of employer-paid arrangement. This includes NQDBs or non-qualified defined contribution plans (NQDCs). On average, these plans deliver an additional 5% to 7% of earnings in annual retirement income to the typical mid-level executive.
Plan Sponsors Support Stricter Fiduciary Standards
A survey of retirement plan sponsors from AARP suggests there is widespread support for holding more types of financial advice to a fiduciary standard. Nearly nine in 10 (89%) plan sponsors say they would favor rule changes (68% “strongly” and 21% “somewhat”) requiring defined contribution (DC) plan providers to only give advice that is in the best interest of plan participants. Nearly as many plan sponsors (88%) favor requiring DC providers to clearly explain to plan participants if the providers’ advice is not obligated to be in the participant’s best interest (59% “strongly” favor this and 29% “somewhat”).
Improving the health of employees, as a way to improve health care costs, is becoming a greater priority for companies, according to a new report. “The Willis Health and Productivity Survey Report 2014” from Willis North America, Inc. finds the top three challenges in controlling health care costs identified by survey participants include employees’ health habits (61%), high cost catastrophic cases (47%) and the cost of compliance due to health care reform (34%). With employee health behaviors topping the list, the authors of the study believe this suggests a continued need for health and wellness intervention.
Private Exchanges Help Retirees Manage Health Care Costs
A survey conducted by the Private Exchange Evaluation Collaborative (PEEC) found 37% of employers have implemented, or are considering implementing, private health care exchanges for pre-65 retirees, and 32% for their post-65 retirees. “Insurance exchanges allow retirees to shop for the best plan to fit their needs using side-by-side price comparisons,” says Tom Grant, president of SelectQuote Senior, based in Kansas City, Kansas. “This empowers retirees, helping them to save time and money.” Grant tells PLANSPONSOR, “As private exchanges are adopted within an organization, plan sponsors can help employees transition by providing customized communication around transition dates and benefit options, and by creating a dedicated point of reference for questions, enrollment and additional plan information. In addition, plan sponsors can secure a partner that will treat employees with the same level of excellence that the employer would.”
Findings from the “2014 Employee Financial Wellness Survey” reveal most employees (81%) believe health care costs will rise over the next several years, and less than half of all Baby Boomers (48%) feel confident they will be able to cover their medical expenses in retirement. Thirty-three percent of employees cited health care costs as one of their biggest concerns about retirement, but fewer employees cited the fear of losing health care coverage as a reason to delay retirement, down 5% this year from 29% last year. In addition, the survey found employees long for the security that guaranteed retirement income would provide. Forty-eight percent of employees say they would be willing to sacrifice a portion of their future pay increases for guaranteed retirement income. Three-quarters (77%) of employees say they prefer a retirement plan with guaranteed fixed monthly payments for life, rather than a plan where they can take a lump sum at retirement and invest the funds themselves.
Some Millennials Turn to Brokerage Accounts Over DC Plans
The young and affluent members of Generation Y (a.k.a., Millennials) show a higher use of online brokerage accounts over defined contribution (DC) plans, a new study finds. According to the study by Hearts & Wallets LLC, “New Insights into the Finances of Generation Y,” Gen Y’s investment preferences center around a desire for financial independence over a traditional leisure retirement, making retirement savings accounts less appealing. In fact, the study shows that 74% of affluent members of Gen Y have assets in an online brokerage account, compared with 67% who have assets in a defined contribution (DC) plan.
When It Is OK to Discriminate
Administering a 401(k) plan under the Employee Retirement Income Security Act (ERISA) can be a regulatory minefield, and plan sponsors are understandably cautious. Take the concept of discrimination in a plan. Plan sponsors are subject to regulations and testing to ensure their plans do not favor highly-compensated employees and to ensure plan benefits, rights and features are available equally. But there is one area for which discrimination is not an issue for plan sponsors, according to Thomas Ryan, senior vice president of communications and education at Fidelity Investments—participant communications. Ryan tells PLANSPONSOR, plan communications are not explicitly considered a benefit or a feature. The plan sponsor who reaches out to target specific demographics of the workforce is in no danger of discriminating.
Economic Events
Inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $518.3 billion at the end of February, up 0.5% from the revised January level and up 4.7% from the February 2013 level, the Census Bureau reported. The January preliminary estimate was revised upward $0.3 billion or 0.1%. February inventories of durable goods were up 0.7% from last month and were up 5.9% from a year ago. Inventories of professional and commercial equipment and supplies were up 1.4% fom last month and inventories of machinery, equipment, and supplies were up 1.4%. Inventories of nondurable goods were up 0.1% from January and were up 2.9% from last February. Inventories of farm product raw materials were up 2.7% from last month, while inventories of petroleum and petroleum products were down 2.6%.
Market Mirror
Wednesday, the Dow had its best day in more than three weeks, gaining 181.04 points (1.11%), to finish at 16,437.18. The NASDAQ climbed 70.91 points (1.72%) to 4,183.90, and the S&P 500 increased 20.22 points (1.09%) to 1,872.18. The Russell 2000 closed 15.74 points (1.38%) higher at 1,159.97, and the Wilshire 5000 was up 228.71 points (1.16%) at 19,962.05. On the NYSE, 3.2 billion shares traded, with 2.6 advancing issues for every declining issue. On the NASDAQ, 2.7 billion shares changed hand, with a 2.8 to 1 ratio of advancers to decliners. The price of the 10-year Treasury note slipped 3/32, bringing its yield up to 2.694%. The price of the 30-year Treasury bond decreased 20/32, increasing its yield to 3.575%.
Financial Sense
Defined contribution (DC) plan participants reduced their holdings in fixed income and increased allocations to U.S. small-cap and mid-cap equities in 2013, while target-date funds (TDFs) continued to increase as a top asset class, says a recent analysis. According to the second annual edition of Northern Trust’s Defined Contribution Tracker, TDFs drew 14.6% of asset flows into retirement plans as tracked by the firm in 2013, the strongest flows of any investment category. It was the second year of strong flows into TDFs, which made up 15.7% of all assets in the Northern Trust universe of DC plans, the second-largest share of any category.
Small Talk
ON THIS DATE:  In 1849, Walter Hunt patented the safety pin. He sold the rights for $100. In 1866, the American Society for the Prevention of Cruelty to Animals (ASPCA) was founded in New York City by philanthropist and diplomat Henry Bergh. In 1912, The Titanic set sail from Southampton, England. In 1933, President Franklin D. Roosevelt established the Civilian Conservation Corps (CCC), an innovative federally funded organization that put thousands of Americans to work during the Great Depression on projects with environmental benefits. In 1941, Ford Motor Co. became the last major automaker to recognize the United Auto Workers as the representative for its workers. In 1953, the horror film The House of Wax, starring Vincent Price, opened at New York’s Paramount Theater. Released by Warner Brothers, it was the first movie from a major motion-picture studio to be shot using the three-dimensional, or stereoscopic, film process and one of the first horror films to be shot in color. In 1970, an ambiguous Paul McCartney ‘self-interview’ was considered an official announcement of the Beatles’ breakup. In 2005, Tiger Woods won his fourth Masters Golf Tournament at Augusta National Golf Club.
SURVEY SAYS: Superstition is the belief in supernatural causality—that one event leads to the cause of another without any natural process linking the two events. Whether they are believed in or not, many of us follow them, just in case, or at least think about them when something happens. This week, I’d like to know, how superstitious are you? How many of the commonly known superstitions do you believe or follow, and do you have any of your own (i.e. If you don’t wear certain shoes, a presentation will go badly.)? You may respond to this week’s survey by 6 p.m. Pacific time today.
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Editorial: Alison Cooke Mintzer alison.mintzer@strategic-i.com

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