Newsdash Insight on Plan Design & Investment Strategy from PLANSPONSOR
July 31st, 2014
Benefit Briefs
Survey Finds Retirees and Pre-Retirees Faring Well
Many recent retirees with 401(k) accounts or rollover individual retirement accounts (IRAs) are doing well financially and emotionally, according to a survey about retirement spending. The results of “First Look: Assessing the New Retiree Experience,” by investment management provider T. Rowe Price, reveal employees in their 50s who are participating in an employer-sponsored 401(k) have accumulated significant assets, but feel more anxious about retirement than those who have already retired. Many retirees have considerable savings, according the survey. Recent retirees report median household assets (i.e., investable assets plus home equity minus debt) of $473,000, with 48% having $500,000 or more in household assets.
Just 43% of retirement plan participants over age 50 have considered a formal withdrawal strategy for accumulated assets, according to a OneAmerica survey. According to the survey from American United Life Insurance Company, a OneAmerica company, workers over 50 are more likely to have considered how to pay for health care after they retire than they are to have formed an income plan—with 64% of respondents saying they have considered post-retirement health care expenses.
Buyer's Market
American Century Emerging Markets Debt, American Century Strategic Income and American Century Short Duration Strategic Income were rolled out by American Century Investments. Emerging Markets Debt is a total return fund that incorporates emerging markets debt with a global currency overlay. The team can invest at least 80% of the portfolio in fixed income and floating rate securities that are economically tied to emerging markets.
Market Mirror
Wednesday, the Dow closed 31.75 points (0.19%) lower at 16,880.36, the NASDAQ closed 20.20 points (0.45%) higher at 4,462.90, and the S&P 500 increased by 0.12 (0.01%) to 1,970.07. The Russell 2000 climbed 4.93 points (0.43%) to 1,146.58, and the Wilshire 5000 ticked up 14.18 points (0.07%) to 20,830.54.   On the NYSE, 3.2 billion shares changed hands, with 1.6 declining issues for every advancing issue. On the NASDAQ, 2.7 billion shares traded, with a 1.4 to 1 ratio of advancers to decliners.   The price of the 10-year Treasury note decreased 27/32, increasing its yield to 2.558%. The price of the 30-year Treasury bond fell 1 23/32, bringing its yield up to 3.313%.
Rules & Regulators
Making Sure Your Form 5500 Is Ready to File
Annual filings always bring a swirl of activity, and July 31 is no different. It also brings a cloud of confusion for plan sponsors, according to Form 5500 mavens. Mistakes on Form 5500, a key part of the overall reporting and disclosure of the Employee Retirement Income Security Act (ERISA), can shut down a plan, says James Holland, director of business development, MillenniuM Investment and Retirement Advisors LLC. Forget to file, or misreport data, and the Department of Labor (DOL) can start levying penalties, which can add up to as much as $30,000 a year. “The fines and penalties can add up pretty quickly,” Holland says. “They’re a lot tougher on those fines and penalties than in the past—you don’t say you’re sorry and walk away anymore.”
The ERISA Industry Committee (ERIC) is urging the U.S. Supreme Court to reverse a federal court ruling that one company’s collectively bargained retiree health benefits are vested for life. In an amicus brief filed with the U.S. Supreme Court, ERIC asks the high court to reverse a decision by the 6th U.S. Circuit Court of Appeals in M&G Polymers v. Tackett. The appellate court reached the conclusion that retirees had a vested right to health care benefits and, in the absence of evidence to the contrary, a vested right to contribution-free health care benefits. Those benefits could not be bargained away without retiree permission. ERIC argues that courts should not presume that silence regarding the duration of retiree health benefits in collective bargain agreements (CBAs) means the parties intended those benefits to vest for life.
Preparing Your 403(b) Plan for an IRS Audit
“Though our 403(b) plan has never been audited by the Internal Revenue Service (IRS), I want to make certain we are troubleshooting for compliance issues that could come up in an audit. Are the Experts aware of any common IRS audit issues?”
Financial Sense
Using a lump-sum window can offer defined benefit (DB) plan sponsors the advantage of “reducing risk and plan size, which can improve the credit rating of a company,” said Jim McHale, a principal with PwC, during a recent webcast. According to David Ehr, a manager with PwC, “A company should have solid reasons and a clear business case for using a lump-sum buyout. They need to ask themselves how this approach will impact the company in terms of administrative expenses and other factors.”
DB Benefit Payments Continue to Stimulate Economy
The $476.8 billion in public and private defined benefit (DB) pension plan payments in 2012 supported $943.3 billion dollars in overall economic output in the national economy, an analysis finds. Though this is less than the more than $1 trillion in economic output measured by the previous biennial study by the National Institute on Retirement Security (NIRS), it is roughly equivalent to the total output contributed by the entire transportation and warehousing industry, which generated $965.2 billion in total output in the national economy in 2012. According to the NIRS report, “Pensionomics 2014: Measuring the Economic Impact of Defined Benefit Pension Expenditures,” nearly $477 billion in pension benefits were paid to 24 million retired Americans. Expenditures made out of those payments collectively supported 6.2 million American jobs that paid nearly $307 billion in labor income, $555 billion in value added (GDP), and $135 billion in federal, state and local tax revenue.
Interest in specific investment outcomes is likely to drive continued institutional exchange-traded fund (ETF) adoption, according to Cerulli Associates. Investment managers that take the approach of acting as a tactical manager and show institutions various ways that they can incorporate ETFs into their asset-allocation models are seeing the most demand from institutional plan sponsors, the research suggests. One ETF strategist with whom Cerulli spoke stated that smaller-sized corporate defined benefit (DB) plans appear to be especially interested in strategic ETF investing—usually because these plans may not be large enough for an efficient separate account structure.
Buy-Ins a Logical Step in Pension Risk Transfer
Plan sponsors have a number of options for offloading pension risk, says Wayne Daniel, head of U.S. Pensions at MetLIfe, including the strategy of a pension “buy-in.” Daniel says another and perhaps more informative name for buy-ins, under which MetLife originally marketed this type of service, is “pension cash-flow guaranty.” As this name implies, the benefit for plan sponsors is ensuring the plan will have enough cash on hand at a given point to meet projected benefits obligations. “So you see a pension buy-in is really part of the risk-transfer spectrum,” Daniel adds. “You can actually think of the full buyout—when all of the liabilities and all of the assets are transferred to the insurer—as being on one end of the spectrum, and then aggressive LDI is on the other end. Under this analogy, the buy-in concept would fit somewhere right in the middle.”
The World at Large
Employee Benefits Consultancy Mercer is planning to have an income drawdown target-date fund (TDF) in place in the U.K. by April of next year, according to its defined contribution (DC) chief Brian Henderson. The new strategy is part of a response to a pension rule change in this year’s budget, ending the requirement for benefits to be annuitized at retirement, and will sit alongside two other target-date funds underlined by a new default investment approach for DC schemes called Mercer Smartpath.
Small Talk
ON THIS DATE:  In 1790, the first U.S. patent was issued to Samuel Hopkins for his process for making potash and pearl ashes, a substance used in fertilizer. In 1875, former President Andrew Johnson died of a stroke while visiting his daughter in Tennessee. In 1928, MGM’s Leo the lion roared for the first time. He introduced MGM’s first talking picture, “White Shadows on the South Seas.” In 1948, U.S. President Truman helped dedicate New York International Airport (later John F. Kennedy International Airport) at Idlewild Field. In 1964, Ranger 7, an unmanned U.S. lunar probe, took the first close-up images of the moon—4,308 in total—before it impacted with the lunar surface northwest of the Sea of the Clouds. In 1975, James Riddle Hoffa, one of the most influential American labor leaders of the 20th century, disappeared in Detroit, Michigan, never to be heard from again. Though he is popularly believed to have been the victim of a Mafia hit, conclusive evidence was never found, and Hoffa’s death remains shrouded in mystery to this day. In 1990, Nolan Ryan won the 300th game of his career, throwing 7 2/3 strong innings with eight strikeouts to lead his Texas Rangers to an 11–3 victory over the Milwaukee Brewers. In 1995, The Walt Disney Company agreed to acquire Capital Cities/ABC in a $19 billion deal.
SURVEY SAYS: This week, we covered a survey that found 88% of respondents work more than 40 hours per week. I’d like to know, are you among that 88%, and what would you do with an extra hour of time each day? You may respond to this week’s survey by 6 p.m. Pacific time today.
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