Administration February 6, 2013

Pension Plans Unlikely to Achieve Return Targets

February 6, 2013 (PLANSPONSOR.com) – Pension plans and other institutions are not expected to achieve their target returns of 7% to 8% over the next 10 years, an analysis finds.
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According to the 10-Year Capital Market Return Assumptions report released by the BNY Mellon Investment Strategy and Solutions Group (ISSG) and BNY Mellon Wealth Management, ISSG analysis derives an expected return of 7% for U.S. large cap stocks and similar risk-adjusted returns for U.S. small and mid cap stocks annually over the 10-year period. These returns are propelled by real earnings growth of 2% per year, a dividend yield of 2.25% and developed market inflation of 2.5%. ISSG noted that the 2% earnings growth projection is significantly below the near-term consensus of 6% annually.  

In fixed income, ISSG sees real cash rates rising to approximately 1% annually in the U.S. in 10 years. ISSG said with inflation at 2.5%, it expects the 10-year Treasury yield to be 3.5%, causing long-term Treasuries to provide a negative return over the 10-year period.  

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“Based on our research and analysis, we are projecting extremely low fixed-income returns and single-digit equities returns over the period, which will make it challenging for institutions to reach their target returns,” said Jeffrey Saef, managing director for BNY Mellon and head of ISSG. “If institutions remain intent on aiming for combined eight percent returns, they may need to seriously consider taking on more risk in their portfolios.”   

Expected returns for alternatives depend heavily on the underlying asset class, with a range of 3% to more than 11% for the category.   

The report notes that interest rate increases could adversely affect returns of fixed-income assets held by pension plan sponsors, many of which are underfunded. However, these same interest rate increases would also reduce plan liabilities, which might result in a net increase in funding levels. Concerned plan sponsors need to consider whether they need to add exposure to equities, and they could consider shortening the duration of their fixed-income holdings, the report says.  

For a copy of the report, please contact Mike Dunn at mike.g.dunn@bnymellon.com.
Benefits February 6, 2013

More DC Plan Sponsors to Add Roth

February 6, 2013 (PLANSPONSOR.com) – An increasing number of U.S. employers are planning to add Roth features to their defined contribution (DC) plans in 2013, a survey found.
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Immediately following the passage of the American Tax Payer Relief Act of 2012 (see “The Increased Availability of Roth In-Plan Conversions”), Aon Hewitt conducted a pulse survey of more than 300 individuals representing large U.S. employers to determine the prevalence of Roth accounts and employers’ likely actions with respect to their plans over the next 12 months. According to Aon Hewitt’s findings, while nearly half (49%) of respondents currently offer no Roth provisions, 29% of those that do not offer Roth are very or somewhat likely to add this feature in the next 12 months. Of those new adopters, more than three-quarters (76%) will add both Roth contribution and in-plan conversion features.  

The survey also found employers that already have a Roth contribution option are likely to allow employees to make in-plan conversions to Roth accounts. Of those respondents that currently allow Roth contributions but do not offer in-plan conversions, more than half (53%) are very or somewhat likely to add this feature in the next 12 months.  

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For companies that already allow Roth contributions and in-plan conversions, more than three-quarters (79%) are very or somewhat likely to expand the eligibility for in-plan conversions, allowing them for previously nondistributable amounts.  

“While employers have steadily been adopting Roth features in recent years, the new law, along with a better understanding of Roth by both participants and companies, will encourage more plan sponsors to add these options in the near-term,” said Patti Balthazor Bjork, director of Retirement Research at Aon Hewitt.

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