Newsdash Insight on Plan Design & Investment Strategy from PLANSPONSOR
March 27th, 2014
Industry Insights
The Cash Balance De-Risking Solution
One can’t talk about pensions today without discussing de-risking. For traditional defined benefit (TDB) plans, there is a well-established de-risking playbook: 1) freeze the plan; 2) migrate to a matching bond portfolio and/or pay lump sums and/or buy annuities. The benefit of reduced or eliminated uncertainty comes at a cost of higher upfront or expected contributions, but with that caveat, the playbook works reasonably well. While cash balance (CB) plans are generally less risky to employers than TDB plans, CB plan sponsors are finding that, when it comes to de-risking, the TDB playbook doesn’t work, and a fresh approach is needed.
Benefit Briefs
Effects of Increasing Retirements on Employer Plans
As more employees retire, plan sponsors need to prepare for the impact on their defined benefit (DB) and defined contribution (DC) retirement plans. Figures from the Bureau of Labor Statistics show that one-fifth of the U.S. work force has either retired or is nearing retirement age. When asked about how this decrease in worker population might impact DC plans, possibly reducing economies of scale and fees for products and services, Kristi Mitchem, executive vice president, State Street Global Advisors (SSgA), tells PLANSPONSOR, “Actually, more employees are leaving money in their employer-sponsored retirement plan after they retire. Plan sponsors have found that while only 10% to 15% of employees used to do that, today it’s more like 59% or 60%.”
While U.S. workers are more satisfied with their financial situation now compared with five years ago, their retirement confidence still remains below levels prior to the financial crisis. According to the Global Benefit Attitudes Survey, released by professional services firm Towers Watson, employees are especially worried about the affordability of health care in retirement, and significant numbers have been forced to cut back on spending and plan to delay retirement, many until age 70 or later.
Basic Fiduciary Education Still Critical
The basics of fiduciary liability need to be instilled in retirement plan sponsors and committee members. Many plan sponsors and plan committee members (i.e., plan fiduciaries) do not realize they are fiduciaries, or they do not fully appreciate a fiduciary’s personal liability, says Brian Lakkides, founder and managing director for Fiduciary Plan Governance LLC. Lakkides, along with other plan compliance experts, took a deep dive into fiduciary liability and education during the second day of the 2014 National Association of Plan Advisers (NAPA) 401(k) Summit in New Orleans.
Buyer's Market
MetLife Inc. appointed Wayne Daniel as vice president for U.S. pensions within the firm’s corporate benefit funding division. Daniel will assume his new role, based in New York, in May 2014. He will also continue his current role as CEO of MetLife Assurance, a specialist bulk annuity pension provider and UK subsidiary of MetLife, through the completion of the sale and transition of MetLife Assurance services to Rothesay Life Limited during the second quarter of 2014.
Professional services and consulting firm Towers Watson named Steve Carlson as head of investments for the Americas region. In this new role, Carlson is tasked with partnering with institutional and corporate clients to improve investment returns through an advisory or outsourced chief investment officer (OCIO) relationship.  
Economic Events
New orders for manufactured durable goods in February increased $5.0 billion, or 2.2%, to $229.4 billion, the U.S. Census Bureau announced. This rise followed a 1.3% January decrease. Excluding transportation, new orders increased 0.2%. Excluding defense, new orders increased 1.8%. Transportation equipment, up after two consecutive monthly decreases, rose $4.6 billion, or 6.9%, to $71.4 billion. This was led by nondefense aircraft and parts, which increased $1.8 billion.
Market Mirror
The Dow was down 98.89 points (0.60%) Wednesday, at 16,268.99. The NASDAQ fell 60.69 points (1.43%) to 4,173.58, and the S&P 500 lost 13.06 points (0.70%) to finish at 1,852.56. The Russell 2000 closed 22.56 points (1.92%) lower at 1,155.49, and the Wilshire 5000 decreased 179.24 points (0.90%) to 19,758.98.   On the NYSE, 3.2 billion shares changed hands, with declining issues outnumbering advancing issues nearly 2 to 1. On the NASDAQ, 2.7 billion shares traded, with a near 4 to 1 lead for decliners.   The price of the 10-year Treasury note was up 16/32, bringing its yield down to 2.692%. The price of the 30-year Treasury bond increased 31/32, decreasing its yield to 3.542%.
Financial Sense
The Risk of Rising Interest Rates for Stable Value Funds
While retirement plan sponsors will find the market for getting into stable value funds has improved, the threat of rising interest rates poses a risk they need to keep in mind. An article from Portfolio Evaluations Inc. (PEI) explains that while most of the concern pertaining to the potential rise in interest rates has been focused on fixed income, stable value funds have been significantly impacted as well. Pooled stable value funds are essentially fixed income portfolios supported by insurance wraps or guarantees, so they carry a significant level of interest-rate risk. The market value of the underlying fixed income portfolio will decline as interest rates rise. Participants do not experience these market value fluctuations due to the products’ insurance component; however, last year’s rise in interest rates had a potential negative impact on the liquidity for stable value funds at the plan sponsor level.
The first quarter of 2014 saw very light pension rebalancing flows, but liability-driven investing (LDI) and de-risking strategies continue to pick up steam. According to a new analysis from UBS Securities LLC, defined benefit (DB) pension plans are likely to post very small quarter-end rebalancing flows into either equities or bonds. This would be a break from the first quarter experience in both 2012 and 2013, when U.S. pensions were large sellers of equities and buyers of bonds. In fact, UBS expects less than $4 billion of first quarter net sales to pension funds for both equities and bonds, which is within the flow analysis model’s margin of error.
Rules & Regulators
IRS Modifies Procedures for Pre-Approved 403(b)s
The Internal Revenue Service (IRS) has modified Revenue Procedure 2013-22, which sets forth procedures for issuing opinion and advisory letters for Section 403(b) pre-approved plans. The IRS has extended the deadline for applications for opinion and advisory letters regarding the acceptability under Section 403(b) of the Internal Revenue Code (IRC) of the form of prototype plans and volume submitter plans, respectively, through April 30, 2015. Revenue Procedure 2014-28 also makes certain modifications to the program established by Revenue Procedure 2013-22 that are intended to allow more plan sponsors and eligible employers to participate in the Section 403(b) pre-approved plan program.
Small Talk
ON THIS DATE:  In 1775, future President Thomas Jefferson was elected to the second Continental Congress. In 1912, in Washington, D.C., Helen Taft, wife of President William Taft, and the Viscountess Chinda, wife of the Japanese ambassador, planted two Yoshina cherry trees on the northern bank of the Potomac River, near the Jefferson Memorial. The event was held in celebration of a gift, by the Japanese government, of 3,020 cherry trees to the U.S. government. In 1939, the University of Oregon defeated Ohio State University 46–33 to win the first-ever NCAA men’s basketball tournament. In 1973, the actor Marlon Brando declined the Academy Award for Best Actor for his career-reviving performance in The Godfather. The Native American actress Sacheen Littlefeather attended the ceremony in Brando’s place, stating that the actor “very regretfully” could not accept the award, as he was protesting Hollywood’s portrayal of Native Americans in film.
SURVEY SAYS: We recently covered a survey about résumé catchphrases. This week, I’d like to know, do you keep your résumé current? Do you think paper résumés are still useful in our high-tech environment, or do you keep your résumé online? And, just for fun, how many of the catchphrases revealed as manager turn-offs in that survey are on your résumé? You may respond to this week’s survey by 6 p.m. Pacific time today.
Sponsored message from NYLM
PLANSPONSOR interviews Scott Francolini, from New York Life Retirement Services  National Practice Leader Scott Francolini shares how New York Life Retirement Plan Services is thinking differently about retirement plan strategy and success, and how the company is combatting today’s industry challenges.
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Editorial: Alison Cooke Mintzer alison.mintzer@strategic-i.com

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