Newsdash Insight on Plan Design & Investment Strategy from PLANSPONSOR
June 12th, 2014
Benefit Briefs
Annuities Boost Retirement Planning Confidence
Annuity ownership strengthens individuals’ confidence about retirement planning and saving, a study from the LIMRA Secure Retirement Institute finds. When asked about their confidence in maintaining a financially healthy lifestyle during their retirement years, 47% of both retirees and pre-retirees say owning an annuity made them more confident they could maintain that lifestyle.
Many employers believe the Patient Protection and Affordable Care Act (or ACA) has negatively impacted their companies, a survey finds. More than half of employers surveyed by the International Foundation of Employee Benefit Plans say the ACA has negatively impacted their companies overall, and two-thirds believe it will negatively impact their companies in the future. More than two in five employers expect to see the greatest cost increases due to ACA in 2015, and costs associated with the excise tax on high-cost group health plans (a.k.a., the Cadillac tax), general ACA administrative costs and transitional reinsurance fee costs are predicted to be the top three ACA cost drivers beyond 2014. The survey report, “2014 Employer-Sponsored Health Care: ACA’s Impact,” shows employers are passing costs to employees.
Employers Consider New Tactics to Tame Health Care Costs
According to Aon Hewitt’s soon-to-be-published Health Care Survey of more than 1,230 employers covering more than 10 million employees, 52% said their current health strategy is focused on traditional trend mitigation approaches, such as employee cost shifting. However, just 21% said this would be their preferred approach in three to five years. Instead, employers are considering new tactics that will require more action from employees. In the next three to five years, more than 60% of employers plan to “gate” employees to richer designs, where employees are required to complete a “task” to access richer design options.
Real estate has a place in defined contribution (DC) plans, the Defined Contribution Real Estate Council contends, but sponsors have concerns over valuation, liquidity and cost. Diversification was cited as a key benefit of alternative investments in general, but plan sponsors remain somewhat confused about the definition of alternative investments, possibly skewing the pace of adoption, the council found in a survey of plan sponsors and consultants.
Industry Voices
Insights: Overconfident?
The Employee Benefit Research Institute (EBRI)’s most recent such finding for workers in their 60s—viz., those with more than 30 years of tenure—is $224,287. Sounds good, right? It does, until you contemplate how that may translate into a paycheck when Americans dip into those savings. That could provide anywhere from a mere $8,970 to $12,600 or so per year, assuming either a 4% drawdown rate or the purchase of a 25-year term fixed annuity with a growth rate of 3%. With those annual “incomes” in mind, I looked with some surprise at participants’ confidence ratings in their ability to achieve their retirement goals and save enough. According to EBRI’s latest Retirement Confidence Survey (RCS), most (72%) workers are either somewhat or very confident they have adequate income during retirement. The confidence levels recorded in our recent PLANSPONSOR Participant Survey found that those with an average account balance of just $68,968 felt assured of their future success. What’s driving this? Where is this confidence coming from?
Market Mirror
Wednesday, the Dow fell 102.04 points (0.60%) to 16,843.88, the NASDAQ slipped 6.07 points (0.14%) to 4,331.93, and the S&P 500 was down 6.90 points (0.35%) at 1,943.89. The Russell 2000 lost 6.00 points (0.51%) to finish at 1,166.71, and the Wilshire 5000 closed 73.91 points (0.36%) lower at 20,612.23. On the NYSE, 3.2 billion shares traded, and on the NASDAQ, 2.7 billion shares changed hands, with 1.6 declining issues for every advancing issue on both exchanges. The price of the 10-year Treasury note was up 1/32, bringing its yield down to 2.642%. The price of the 30-year Treasury bond increased 7/32, decreasing its yield to 3.468%.
Rules & Regulators
Groups Weigh In on Proposed Fee Disclosure Guide
From excluding large plans to asking for wording that would prompt consultation with the plan adviser, organizations are petitioning the Department of Labor (DOL) about the proposed 408(b)(2) guide. In March, the DOL proposed changes to Section 408(b)(2) of the Employee Retirement Income Security Act (ERISA), which would simplify the way fee data is presented to some plan sponsors and participants. Existing 408(b)(2) rules require companies that provide certain financial services to employer-sponsored 401(k) plans to furnish detailed information about those services and the compensation they receive, including data about payments from third parties and revenue-sharing agreements. The ERISA Industry Committee (ERIC) is asking for large plans to be excluded from the DOL’s proposal to require service providers to distribute a guide or similar tool to fiduciaries.
Financial Sense
During April, as indicated by the Mercer U.S. Pension Buyout Index, the average cost of purchasing annuities from an insurer increased from 108.6% to 108.9% of the accounting liability. The economic cost of maintaining the liability remained level at 108.7% of the same liability. Mercer notes that some plan sponsors have been reluctant to transfer liabilities to an insurer arguing that it is too expensive, particularly compared with the accounting liability. However, the accounting liability does not include all costs associated with maintaining the plan. Since last October, the approximate cost of maintaining the plan continues to be approximately the same as the cost of transferring liabilities to an insurer for the sample plan modelled in the Mercer index.
Diversity Can Benefit Investment Committees
Plan investment committees could benefit from a greater diversity in membership, says a new paper from Vanguard. “Unsticking the Status Quo: The Role of Diversity in Investment Committee Effectiveness” examines how investment committees define and value diversity, as well as the impact of diversity on the committee’s effectiveness. The paper notes that investment committee structures thus far have been oriented toward building a diverse committee on the basis of the members’ professional background experience, but cautions that this should not be the only diversity factor at play. Catherine D. Gordon, author of the paper and principal for Vanguard’s Investment Strategy Group, tells PLANSPONSOR, “On the one hand, you have social diversity, which relates to age, gender, ethnicity and other such factors. You also have information-processing diversity, where you have people from different experiential backgrounds and who may offer more creative solutions.”
The World at Large
Auto enrollment in the UK has meant the proportion of people who work in retail who are adequately saving for retirement has increased the most since 2012.
Small Talk
ON THIS DATE:  In 1944, Lieutenant John F. Kennedy received the Navy’s highest honor for gallantry for his heroic actions as a gunboat pilot during World War II. The future president also received a Purple Heart for wounds received during battle. In 1963, in the driveway outside his home in Jackson, Mississippi, African American civil rights leader Medgar Evers was shot to death by white supremacist Byron De La Beckwith. In 1987, in one of his most famous Cold War speeches, President Ronald Reagan challenged Soviet Leader Mikhail Gorbachev to “tear down” the Berlin Wall, a symbol of the repressive Communist era in a divided Germany. In 1994, Nicole Brown Simpson, famous football player O.J. Simpson’s ex-wife, and her friend Ron Goldman were brutally stabbed to death outside Nicole’s home in Brentwood, California, resulting in what quickly became one of the most highly publicized trials of the century. In 2003, the film actor Gregory Peck, best known to many for his Academy Award-winning portrayal of the courageous, dignified lawyer Atticus Finch in “To Kill a Mockingbird” (1962), died at his home in Los Angeles, at the age of 87.
SURVEY SAYS: Sunday is Father’s Day. Our last Father’s Day survey asked for words of wisdom from Dad. This year, I’d like to know, which TV dad is your dad most like? 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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