Investing June 20, 2018

401(k) Participants Tend to Hold Lower Cost Mutual Funds

The expense ratios 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000, Investment Company Institute data shows.

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The downward trend in the expense ratios that 401(k) plan participants incur for investing in mutual funds continued in 2017, according to Investment Company Institute (ICI) data.

According to the report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017,” the average expense ratio 401(k) plan participants incurred for investing in equity mutual funds fell from 0.48% in 2016 to 0.45% in 2017. The average expense ratio 401(k) plan participants incurred for investing in hybrid mutual funds fell from 0.53% to 0.51%, and the average expense ratio 401(k) plan participants incurred for investing in bond mutual funds fell from 0.35% to 0.33%.

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The expense ratios 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000, the data shows. In 2000, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity mutual funds. By 2017, the average expense ratio experienced a 42% decline. The average expense ratios that 401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell from 2000 to 2017, by 29% and 46%, respectively.

According to the report, 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At year-end 2017, 401(k) plan assets totaled $5.3 trillion, with 40% invested in equity mutual funds.

ICI says it uses asset-weighted averages to measure the expense ratios that mutual fund investors actually incur for investing in mutual funds. The simple average expense ratio, which measures the average expense ratio of all funds offered for sale, can overstate what investors actually paid because it fails to reflect the fact that investors tend to concentrate their holdings in lower-cost funds.

401(k) equity mutual fund investors tend to pay lower-than-average expense ratios than for the industry. In 2017, the asset-weighted average expense ratio for all investors in equity mutual funds was 0.59%, while for 401(k) equity mutual fund investors, it was 0.45%.
Administration June 20, 2018

PSNC 2018: Pension Risk Transfer Options

DB plan sponsors want to keep control of their plans as they de-risk.

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The transferring of risk, or de-risking, from defined benefit (DB) plans has become a focus of pension plan providers over the past few years.

Risk transfer or de-risking transactions addressing pension plan risks can include several options: the purchase of annuities from an insurance company that transfers liabilities for some or all plan participants (removing the risks cited above with respect to that liability from the plan sponsor); the payment of lump sums to pension plan participants that satisfy the liability of the plan for those participants (either through a one-time offer or a permanent plan feature); and the restructuring of plan investments to reduce risk to the plan sponsor.

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At the 2018 PLANSPONSOR National Conference, David Hinderstein, president, Strategic Retirement Group, Inc., in White Plains, New York said, “Many pension plans are frozen and these plan sponsors have been waiting for something to happen. They are hoping and hope has become expensive.”

Maintaining a frozen pension plan is expensive, according to Hinderstein, and it means contributing fees to the Pension Benefit Guaranty Corporation (PBGC). The flat-rate-per-participant premium for single employer plan increased 130% since 2013. The variable rate is a percentage of a plans unfunded status. 

Hinderstein said, “Plan sponsors have begun to take action to deal with liabilities but there are a few service providers that can help plan sponsors keep their frozen plans which slows down the process. Why derisk? To help fund the plan they are derisking.”

An example of a partial risk transfer is how FedEx recently entered into an agreement to purchase a group annuity contract with Metropolitan Life Insurance Co. to transfer about $6 billion in pension plan obligations. By taking on a portion of the payment obligations of the FedEx DB plan, it will help the company secure its pension obligations and provide its retirees with financial security. Companies are chunking out their liabilities so that those funds do not grow.

In addition, many plan sponsors are offering terminated employees lump sums payments. Hinderstein said there is on average a 65% take rate.

Mike Devlin, principal, BCG Pension Risk Consultants, which specializes in assisting plan sponsors with managing their pension risk, stressed the importance of a plan sponsor keeping control of its plan as it derisks.  He said, “Restructuring the plan through an IRS determination letter can be complex and interest rates are unpredictable. Instead transact under your own conditions and you can predetermine the timing with the market as to what you do. Plus, never move all your retirees at one time. Figure out how much you will save over X amount time and do what makes sense economically.”

Michael Kozemchak, managing director at Institutional Investment Consulting interjected, “It’s going to cost more to keep the liabilities than to move them to an insurance company. It makes more sense to move it right now. Figure out what the annuity price needs to be for it to make sense financially for your plan.”

The fourth quarter of the year is very busy for these insurance companies according to Marty Menin, director of retirement solutions division at Pacific Life, specializing in pension risk transfer and other group annuity contract solutions. “[Insurance providers have many] other companies to look at that time and plan sponsors are back to losing control of their transaction. When insurance companies get busy they won’t be as competitive and you want the best price for the annuitization.”


 

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