The aggregate pension funded status for S&P 500 firms rose in October,
from 78.7% to 80.8%, according to the Aon Hewitt Pension Risk Tracker. Year to
date, the funded status deficit has increased by $3 billion.
Month-to-date
pension asset returns were strong throughout October, yielding a 3.6% return. The
month-end 10-year Treasury rate increased 10 basis points relative to September’s month-end rate, while credit spreads narrowed by 14 basis points.
This combination resulted in a decrease in the interest rates used to value
pension liabilities from 4.15% to 4.11% over the month. Given that a majority
of U.S. plans are still exposed to interest rate risk, the decreasing rates
that increased the pension liability marginally counteracted the positive
effects from asset returns on the funded status of the plan.
Year to date,
the aggregate funded ratio decreased, from 81.3% to 80.8%. According to Aon Hewitt’s estimates, this change
was driven by a liability reduction of $67 billion, which outpaced the asset
reduction of $64 billion year to date.
“While the funded status of U.S. pension plans continues to
improve, the recently passed Balanced Budget Act of 2015 provides additional
funding flexibility in future years, presenting a prime opportunity for
sponsors to review their funding strategies,” says Ari Jacobs, senior partner
and global retirement solutions leader at Aon Hewitt. “Despite the improving
funded position of U.S. pension plans, the Act also increases PBGC premiums.
These increases should be taken into account as plan sponsors review the
strategic alternatives around their pension plans.”
The Aon Hewitt Pension Risk Tracker tracks the
daily funded status of 360 S&P 500 companies with defined benefit pension
plans.
Financial Engines to Acquire Brick-and-Mortar Advisory
Not convinced that robo-advisers are shaking up the defined
contribution retirement plan advisory space? This week’s news that digital-advice
darling Financial Engines will acquire a firmly established traditional advisory
chain, The Mutual Fund Store, might finally change your mind.
As in politics, deep countercurrents and sudden opportunity-taking
determine many of the trends shaping the retirement plan advisory space—and it
often makes for strange bedfellows, as the saying goes. Such is the case with the
newly announced acquisition of The Mutual Fund Store, a 125-location advisory
chain serving various retirement market verticals, by Financial Engines, one of
the more successful robo-advisers in recent years.
You read that right—a robo-adviser has decided to scoop up a
large national registered investment adviser (RIA) in order to deliver more
in-person advice and holistic, relationship-based advising. Terms of the deal include total consideration
of approximately $560 million to be paid by Financial Engines, including cash
and stock.
PLANSPONSOR sat down with Financial Engines President and CEO Lawrence (Larry) Raffone to unpack the deal details
and what it all means in the context of the institutional defined contribution
(DC) retirement planning market. For the record, Raffone says this “is not a
brick-and-mortar” play, and instead represents a move towards a more holistic
offering for Financial Engines’ many clients. He says the driving rationale for
the acquisition is presented clearly and concisely in research the firm
published earlier this year, “The Human Touch,” which shows clearly that a middle ground
is emerging in the robo versus traditional advice debate.
“The research found that even those who are interested in
using robo-advisers would value access to in-person advice for certain
situations and circumstances,” Raffone explains. In other words, robo-advising
and traditional advising are not mutually exclusive approaches to doing business in
the intuitional retirement plan advisory space.
Raffone summarizes four additional strategic objectives for Financial
Engines in obtaining the traditional advisory chain: Greater usage and
retention of Financial Engines’ services by a given client; expanded market
opportunities to help 401(k) participants with more complex needs; significant
earnings per share accretion; and strong synergies and higher future growth.
NEXT: Terms of the
deal
Raffone says the culture at The Mutual Fund store will make it
a great fit, as the firm already has the capacity to deliver high quality personalized
financial planning and objective, fiduciary advice through advisers in
locations across the United States. Specifically, Financial Engines will gain the
use of approximately 345 employees/reps and immediate access to approximately
84,000 new accounts at about 39,000 households. The Mutual Fund store carries
over $9.8 billion in assets under management, as of October 31, 2015, according
to press materials.
For merger and acquisition buffs out there, Financial
Engines explains the total transaction purchase consideration includes
approximately $250 million in cash and 10 million shares of Financial Engines
common stock. The combined company will be debt-free following the transaction.
Based on the common stock portion of the transaction, private equity firm Warburg
Pincus will receive Financial Engines common shares representing approximately
12.5% of the pro forma shares outstanding. Concurrent with the closing of the
acquisition, Michael Martin, managing director of Warburg Pincus, will be
appointed to serve on Financial Engines’ board of directors.
Raffone says this introduction of a private equity
representative onto the Financial Engines board of directors is also a natural
extension for the company, which “started as a Silicon Valley play back in the mid-90s.”
He says the ongoing discussion and investment from Warburg Pincus will accelerate
innovation and improve client services and growth potential over time.
The transaction is expected to close in the first quarter of
2016 and is subject to regulatory approvals and other customary closing
conditions. DBO Partners acted as financial adviser to Financial Engines, and
Pillsbury Winthrop Shaw Pittman provided legal counsel. J.P. Morgan acted as
financial adviser and Wachtell, Lipton, Rosen & Katz provided legal counsel
to Warburg Pincus.
NEXT: Deal from the ground
level
Raffone explains that participants and plan sponsors have
simply been hounding the company for more services—not to replace the
robo-advising core of what Financial Engines does but instead to complement it.
For the company’s existing 9.2 million clients, who are
distributed across the United States and are connected to Financial Engines
through their workplace defined contribution retirement plans, a whole host of
new services will soon be rolled out, Raffone says, from greater access to
advisers in the workplace to weekend and evening meeting hours at The Mutual
Fund Stores’ existing offices. Critically, as much as 50% of the current client
base of Financial Engines
lives/works close enough to an existing Mutual Fund
Store location to make evening and weekend advising very practical.
“From day one it’s going to be an effective complement to
what we already offer and will represent a true, comprehensive financial
wellness benefit,” he explains, noting that clients will still be able to use
video-calling features and over-the-phone advising. “Our client base has told us clearly that video advising and advising over the
phone are very useful for some things, but even though you’re dealing with a real person, in some ways it is still not the same as
true in-person advice. They really want the holistic approach and a chance to meet face-to-face with a pro.”
Interestingly, Raffone appears nonplussed by danger of trying to do too many things for too many people. “To do
everything for everyone you need to have the best technology and the best
approach, and I believe we have that,” Raffone concludes.