Funded Status for Pensions Rises in November

US pension plans rose modestly in November, according to reports from financial services company Northern Trust Asset Management and consulting firm Mercer.

Northern Trust reported that the average funded ratio increased during the month to 83.4%, from 83.0%. It , attributed the increase to global equity markets returning nearly 2%, which outweighed the average discount rate decreasing modestly to 3.66% from 3.69%.

For the year-to-date through November, Northern Trust said the average funded ratio has risen to 83.4% from 80.0% at the beginning of year. It said strong asset returns—equity returns for global stocks are up 22% this year—have more than compensated for the decline in discount rate, which leads to higher liabilities.

It also reported that the estimated deficit for pension plans of the S&P 500 corporations has declined to $354 billion at the end of November, from $407 billion at the beginning of the year.

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Northern Trust said companies have accelerated contributions as a way to reduce Pension Benefit Guaranty Corporation (PBGC) premiums, and lock-in tax savings at the current rates.

“Making a contribution before the end of the year has the added benefit of potentially lowering the pension expense for 2018, since the expense will be calculated off of a higher asset base,” said Dan Kutliroff, head of OCIO Business Strategy at Northern Trust, in a release.

Meanwhile, Mercer reported that the funded status for the S&P 1500 companies rose by 1% in November to 84%, as a result of an increase in discount rates and positive equity markets. The estimated aggregate deficit decreased $28 billion during the month to $359 billion from the end of October. The aggregate deficit is also down $49 billion from the $408 billion reported at the end of 2016.

“Equity markets continued to rise, leading to the highest pension funded status in over three years,” Matt McDaniel, a partner in Mercer’s wealth business, said in a statement. “Plan sponsors are looking at high equity valuations and rightfully asking themselves if now is the right time to dial back risk. At the same time, looming reductions in corporate tax rates provide a strong incentive to accelerate funding.”

McDaniel added that as a result of the tax bill, “we expect many plan sponsors to accelerate funding while at the same time de-risking using both investment policy and risk transfer.”

Tags: Mercer, Northern Trust, PBGC, Pension

Fiduciary awareness among defined contribution (DC) plan sponsors has deteriorated significantly in recent years, according to a new report from asset management company AllianceBernstein.

The report, which surveyed more than 1,000 plan sponsors, found that fiduciary awareness among DC plan sponsors has been steadily declining over the past six years. It said that although all respondents qualified as plan fiduciaries, nearly half (49%) of plan sponsors do not consider themselves a fiduciary. This is up from 37% in 2014, and 30% in 2011.

“Sponsors now face added responsibilities under the [Department of Labor’s] new fiduciary rule, yet they’re less aware of their fiduciary status today than before—and because of legal ramifications, what you don’t know can hurt you,” said Jennifer DeLong, head of defined contribution at AB, in a statement. “These are clearly challenging trends in the DC landscape that require action and change.”

The report said that one way to boost fiduciary awareness is to hire a financial advisor or consultant. It found that sponsors who use a financial advisor or consultant have a better understanding and awareness of their fiduciary responsibilities. Additionally, more plans using advisors show increased participation rates (49% vs. 40% for non-advisor plans), increased average savings (57% vs. 37% for non-advisor plans), and participants improving their retirement readiness (22% vs. 11% for non-advisor plans).

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One way to increase participation, according to the report, is through re-enrollments. AllianceBernstein said more plan sponsors see that re-enrollments boost participation rates, deferral rates, diversification—and retirement readiness. In 2013, only 10% of survey respondents said they were considering a re-enrollment in the near future. However, since then, more than 40% say they have recently done a re-enrollment, and 23% say they’re considering doing so within the next two years.

The report also found that reenrollments into qualified default investment alternatives (QDIA) steer participants into more effective investment options. It said nearly 60% of sponsors were most concerned that participants lack awareness of how much they need to save for retirement needs, and 54% said participants do not understand their investment options.

Many workers who actively choose investments for their accounts don’t make the best choices and some make no choices at all,” said the report. “Thus, re-enrollments with a QDIA have become an increasingly popular way to remove asset-allocation guesswork, and boost participation rates, deferral rates, diversification, and retirement readiness.”

Use of target-date funds continues to grow, said the report, most notably among plans with less than $1 million in assets under management, which is up to 40% from 33% in 2014. Respondents cited performance first (54%) when asked about what they think are the most important attributes, followed by cost (41%), quality of asset management (40%), and appropriate glide path (32%).

“With fees coming under greater scrutiny each year, one way plans could find cost savings is by using collective investment trusts,” said the report. “Roughly 40% of plans still use first-generation, off-the-shelf proprietary mutual funds, but the industry is seeing rapid growth in collective investment trust series.”

Tags: AllianceBernstein, Pension, Report