Administration April 28, 2014

Investors Using Smart Beta in Many Ways

April 28, 2014 (PLANSPONSOR.com) – Investors in North America and Europe are making use of smart beta indexes in diverse ways, according to a survey from global asset manager Russell Investments.
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Smart Beta: A Deeper Look at Asset Owner Perceptions finds among those investors managing more than $10 billion (35% of those surveyed), smart beta indexes are being sought more for their investment utility—helping to achieve broader portfolio objectives such as risk reduction and return enhancement—rather than for basic cost savings. And across North America and Europe, asset owners’ use of smart beta indexes and smart beta index-based investment strategies is diverse, from use as market benchmarks to tools to control unwanted exposures or to emphasize certain investment factors in global multi-asset portfolios.

Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated respondents’ evaluation of smart beta strategies, with more than 60% of asset owners in North America and Europe attributing their evaluation to each of these two investment objectives. The greatest unmet need cited by asset owners is for smart beta indexes that help control factor exposures.

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Cost savings, cited just 15% of the time, ranked at the bottom of the list of motivating factors.

Low-volatility and fundamentally weighted index strategies dominate on asset owners’ radar globally, but there are large regional differences in which strategies are more popular and how they are used. For example, asset owners in the U.S. and the UK were most interested in fundamentally weighted index strategies, while in Canada and Europe ex-UK, volatility-control indexes were most popular among asset owners.

Eighty-eight percent of respondents with more than $10 billion in assets have evaluated smart beta or plan to do so in the next 18 months; 77% of respondents with assets between $1 billion and $10 billion, and 50% of those with assets under $1 billion responded similarly.

Thirty-two percent of asset owners currently have smart beta allocations. For asset owners who currently have smart beta allocations, 53% expect to increase their allocation and only 5% plan to reduce it in the next 18 months. For asset owners currently evaluating smart beta, or planning to evaluate its use in the next 18 months, 76% expect to make an allocation.

    The survey found there is no agreement on naming, and smart beta definitions vary by region and asset size.

    • In North America, the most popular name was “alternatively weighted indexes” (33% of survey respondents preferred this name), while in Europe “smart beta” is the preferred name (35% of respondents).
    • When segmented by size, “alternatively weighted indexes” is most popular among owners of assets less than $1 billion, “smart beta” and “alternatively weighted indexes” are essentially tied among owners of assets between $1 billion and $10 billion, and “smart beta” wins among owners of assets exceeding $10 billion.

    “Our survey confirms that we’ve clearly reached a new stage in the evolution of investment management. Smart beta indexes and investment strategies are gaining traction among asset owners because these highly sophisticated investors are finding value in their investment outcomes and characteristics,” says Rolf Agather, managing director of global index research and innovation for Russell Investments, based in Seattle. "The results of our survey underscore that asset owners’ growing interest in and adoption of smart beta strategies has driven the need for additional information, education and advice.”

    The survey was conducted between January 22 and February 20. Survey participants included 181 asset owners with at least $200 million in assets under management in the United States, Canada, Europe, and the Middle East across a broad spectrum of pension plans, endowments and foundations of different asset sizes, regions and in different stages of their evaluation and adoption of smart beta.

    More information about the survey can be requested here.

      Benefits April 28, 2014

      Financial Wellness Not Just a Benefit for Employees

      April 28, 2014 (PLANSPONSOR.com) - Helping employees attain financial wellness is not just another part of the benefits program—it can be healthy for a company’s bottom line.
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      The point of financial wellness is it helps reduce financial stress, Matt Iverson, founder of Boulevard R, a retirement plan services provider, said in a recent webinar. Employees who are stressed financially tend to have higher health care expenses—about $300 per employee per year stemming from anxiety, insomnia, headaches and depression, Iverson says.

      In addition, when employees cannot afford to retire, there is a real cost to the firm, Iverson says. An older workforce that delays retirement in order to accumulate sufficient assets can cost an employer about $10,000 in insurance premiums per employee per year, assuming employees in their mid-sixties, compared with employees in their 40s.

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      According to Matt Gnabasik, managing director of Blue Prairie Group, an advisory firm that focuses on Employee Retirement Income Security Act (ERISA) issues, the problem of lagging financial illiteracy is widespread throughout the U.S., and it can directly impact workplace productivity. “There are clear, compelling, causal relationships between people who are financially stressed leading to higher costs in the workplace,” he says, “more than if they weren’t financially stressed.”

      For millions of Americans, six months of income in reserve is a pipe dream, and “most of us are not anywhere near to being on track for retirement, using 80% of pre-retirement income as a benchmark,” he adds. The increasingly complex nature of paying for health care costs further adds to the problem.

      An effective financial wellness program has several key points, Gnabasik says, including information about holistic spending and budgeting, debt management and retirement planning. Instead of simply taking a scattered approach to benefit programs, using financial wellness can bring everything together if it is delivered well. “It includes retirement, but it’s bigger than retirement,” he says.

      The program should provide access democratically to everyone in a workforce. It’s not a C-Suite benefit, Gnabasik says, but serves those individuals without liquid assets. Individuals should receive customized, actionable information delivered across multiple media platforms. Activities can be measured and tracked, and the results reported back to clients.

      Financial wellness is not about selling products, and there should be no real or perceived conflicts of interest. While the Web may be the easiest way to reach out to participants, Gnabasik says, in-person channels should be provided as well.

      No matter how strong a company’s retirement plan, workers often don’t bother to figure out the best way to participate or take advantage of it, according to Gnabasik. The problem is made worse when plan sponsors take the attitude that it’s up to the participants to educate themselves. “The employer has a huge economic incentive to help participants figure it out,” he says. “You can make a strong, rational economic argument that it is good business for the plan sponsor to put together a financial wellness program.”

      Iverson agrees, pointing out that even a small amount of marketing effort about the plan and its benefits can boost employee enthusiasm for a company’s benefits package. “If possible, communicate or benchmark the plan to industry averages,” Iverson says. “It puts the plan in perspective for them. They may not necessarily know how it compares to other plans.”

      Another important step, Iverson says, is to remind employers the biggest line item expenses besides payroll are often health care and running, maintaining and matching the retirement plan. It’s a significant investment, he says, so why not highlight how valuable it is?

      The average cost to implement a financial wellness program depends on the features and services. Iverson says an average program for 10,000 participants would cost about $50,000.

      Several online calculators can help assess the return on investment (ROI) for implementing a financial wellness program, including the Personal Financial Wellness (PFW) scale available from the Personal Finance Foundation, and Boulevard R’s own Retiremap. 

      Iverson admits that implementing financial wellness programs can have a downside for some organizations. Famously, he notes, MacDonald’s put together a financial wellness program that highlighted budget issues, which had the unfortunate effect of underscoring the financial challenges their employees face. “Big-box retail operations with high turnover, low tenure and low wages can be a challenge,” he says. “The investment you make in helping employees improve their financial habits, it’s hard to justify that cost in these cases. You might not get that ROI.”

      Financial wellness and better plan engagement seem to go hand in hand. As employees become more financially fit, they tend to increase savings and deferral rates. “You don’t have to make the match formula any richer if you can do a better job of engaging employees around the retirement plan as a benefit,” Iverson notes. “You can dramatically improve their overall engagement in the plan and overall satisfaction with the plan and their benefits.”

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