Data and Research September 7, 2016

Sponsors Greatly Value Retirement Income

However, they are waiting on safe harbor guidance from the DOL before offering annuities in plans.
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In the past four years, plan sponsors have definitely gotten the message on the importance of showing retirement account balances as income, rather than just as savings, as 85% say the core purpose of a defined contribution (DC) plan is to provide income, up from 9% in 2012, according to the MetLife 2016 Lifetime Income Poll.

Additionally, 96% think it would be helpful if balances were shown as income, and 92% would like the Department of Labor (DOL) to provide a safe harbor so that they can include annuities in their plans. When analyzing the solvency of annuity providers, 76% of sponsors would prefer to rely on the assessments of state insurance commissioners, as opposed to conducting the due diligence themselves.

Ninety percent of sponsors think plan design should be simple, as offering too many choices often leads to inertia. Additionally, 58% of sponsors do not think that withdrawal solutions with minimum guarantees are easy for the average plan participant to understand.

When asked about their approach to retirement income, 79% of sponsors think that allowing participants to take a partial lump sum and a partial annuity is preferable to requiring them to take either a lump sum or an annuity, and 72% think that offering the latter two options may not be in the best interest of participants.

“No longer can DC plans exist solely as retirement savings plans,” says Tim Brown, senior vice president and head of life and income funding solutions at MetLife. “The core purpose of today’s DC plans must be recast to move beyond retirement savings to retirement income, by enabling plan sponsors to provide the education, tools and solutions to help participants make their savings last a lifetime.”

Roberta Rafaloff, vice president, institutional income annuities at MetLife, adds: “Today, only 6% of plan sponsors say their 401(k) plan includes a guaranteed lifetime income option. This number could rise exponentially once the DOL completes the work on an updated safe harbor rule. Two-thirds of plan sponsors whose plans do not currently include a guaranteed income options reported that they would be at least somewhat likely to make income annuities available for DC plan participants once the rule is announced.”

MMR Research Associates conducted the online survey of 212 sponsors for MetLife in mid-May.
Administration September 7, 2016

DB Funded Status Analyses Show Moderate Differences

Analyses by Mercer, Wilshire and LGIMA varied on whether DB funded status increased, decreased or remained the same in August.
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The aggregate funded ratio for U.S. corporate pension plans increased by 0.2 percentage points to end the month of August at 76.2%, narrowing its year-to-date decline to 5.1 percentage points, according to Wilshire Consulting.

According to Wilshire, the monthly change in funding resulted from a larger decrease in liability values of 0.3% that was partially offset by a 0.1% decrease in asset values. The year-to-date decrease in funding is the result of a 15% increase in liability values.

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Wilshire’s aggregate figures represent an estimate of the combined assets and liabilities of corporate pension plans sponsored by S&P 500 companies with a duration in-line with the Citi Group Pension Liability Index – Intermediate. The Funded Ratio is based on the CPLI – Intermediate liability, with service cost, benefit payments and contributions in-line with Wilshire’s 2016 corporate funding study.  The most current month end liability growth is estimated using the Barclays Long Aa+ U.S. Corporate Index. 

Mercer reports that the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained relatively level at 77% during August, as a small increase in discount rates was offset by slight negative returns in equity markets. As of August 31, the estimated aggregate deficit of $570 billion represents an increase of $8 billion as compared to the end of July. The aggregate deficit remains down by $166 billion from the $404 billion deficit measured at the end of 2015.

Mercer notes that the S&P 500 index lost 0.1% and the MSCI EAFE index lost 0.2% in August. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 3 basis points to 3.38%.

According to Legal & General Investment Management America, Inc. (LGIMA), pension funding ratios modestly decreased over August. Global equity markets increased 0.39% and the S&P 500 increased 0.14%. LGIMA estimates plan discount rates were unchanged, as Treasury rates rose 7 basis points while credit spreads tightened 7 basis points. Overall, liabilities for the average plan were up 0.40%, while plan assets with a traditional “60/40” asset allocation decreased by 0.16%.

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