Data and Research September 12, 2018

Examining the Root Causes of Financial Stress

Marsha Whitehead, OneAmerica vice president of enterprise marketing, explains how evaluating top financial concerns provides great insight into the root causes of financial stress.

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In addition to evaluating participant financial stress levels, a new OneAmerica survey also looks at the specific factors causing participants to experience financial stress.

Two in three retirement plan participants indicate they have moderate to very high levels of financial stress, according to recent client polling conducted by OneAmerica.

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The firm finds one in five Americans report feeling “high” to “very high” financial stress levels.

“Not having enough for retirement was the top financial concern, cited by 34% of participants; not having enough to pay monthly bills was cited by 23% of participants, and not being able to pay housing costs was cited by 15% of participants,” the survey report says. “The study found that age impacts participant top financial concerns, with younger individuals showing more concern about meeting day-to-day expenses, and older individuals indicating they are more concerned about not having enough for retirement.”

Marsha Whitehead, OneAmerica vice president of enterprise marketing, notes that evaluating top financial concerns provides great insight into the root cause of financial stress.

“It is critically important for plan sponsors to understand and address participants’ concerns around retirement preparation and day-to-day financial needs,” Whitehead suggests. “Failing to do so might not only lead to a financially stressed work force, but one that may experience increased absenteeism, tardiness, decreased productivity and safety issues.”

OneAmerica’s survey shows one in three participants report that being able to meet day-to-day and monthly expenses most closely aligns with their definition of being financially well. One in four define financial wellness as having enough money to retire, followed by being prepared for a financial emergency or life event (15%), having a controlled level of debt (14%) and achieving a desirable level of income (12%), says the firm.

According to the polling, nearly one in four participants indicate that gaining control of their debt is most important when it comes to feeling financially well, followed by 22% indicating that contributing more to their retirement plan will help them in achieving financial wellness. Creating a formal budget or spending plan was cited by 19% of retirement plan participants.

“As the industry looks to place a value on a participant’s or a plan’s financial wellness, it is important to look at these results and understand that achieving financial wellness varies from participant to participant and can shift as an individual ages,” observes Melissa Musial, OneAmerica marketing research and data manager. “Although we see retirement preparation as a top financial concern and near the top of how participants define and achieve wellness, basic financial concerns such as meeting day-to-day expenses often take priority. If a plan sponsor has not yet implemented a financial wellness program, now is the time.”

A white paper with additional survey results is available for download here.

Administration September 12, 2018

August DB Funded Status Remains Level at 91%

The aggregate funded ratio is up 6.1 percentage points year to date, according to Wilshire Consulting.

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The estimated aggregate funding level of pension plans sponsored by Standard & Poor’s (S&P) 1500 companies remained level at 91% in August, as a result of an increase in equity markets that was offset by a decrease in discount rates, according to Mercer.

As of August 31, the estimated aggregate deficit of $192 billion decreased by $1 billion, as compared with the $193 billion measured at the end of July.

The S&P 500 index increased 2.9%, and the MSCI EAFE index decreased 1.5% in August. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 7 basis points (bps) to 4.08%.

“Funded status was flat in August, with another month of favorable returns offset by a slight decline in rates,” says Scott Jarboe, a partner in Mercer’s wealth business. “We expect the extended bull market, coupled with an approximate 50-basis-point risk in discount rates in 2018, will be a catalyst for plan sponsors to review policy and look for opportunities to lock in some gains or transfer risk off the balance sheet. For the many corporate plan sponsors that are making additional tax-favored contributions before September 15, we believe this activity will accelerate.”

Northern Trust reported that the average funded ratio for S&P 500 corporations with pension plans remained near a 10-year high of 90.2%. Northern Trust said this was driven by lower interest rates, with the average discount rate decreasing from 3.87% to 3.82% in August. In addition, the firm said, slightly positive returns in return-seeking assets helped the funded ratio. Global equity markets were up 0.8% in August. U.S. equities posted strong returns, but those gains were muted by a decline in non-U.S. equities.

“August continued the positive pension trend for 2018,” says Dan Kutliroff, head of OCIO [outsourced chief investment officer] business strategy at Northern Trust. “A combination of rising interest rates and positive equity markets improved the funded status from 85% to 90%. This may present a good opportunity for plan sponsors to consider moving to preserve some of those gains by moving some of their assets from equity-like vehicles to fixed-income assets that behave more like the liabilities. While this change could result in a slight reduction in the expected return on asset component, the improved funded status could be enough to offset the lowering of that assumption, mitigating any increase in the P&L [profit and loss] pension expense.”

According to Wilshire Consulting, the funded ratio for U.S. corporate pensions increased by 0.3 percentage points, to end the month of August at 90.7%, up 7.9 percentage points over the trailing 12 months. The monthly change in funding resulted from a 0.4% increase in the liability values more than offset by a 0.8% increase in asset values. The aggregate funded ratio is up 6.1 percentage points year to date and 7.9 percentage points over the trailing 12 months.

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“August saw funded ratios increase due to positive market returns for most asset classes,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group at Wilshire Consulting. “August’s 0.3-percentage-point increase in funding brings the aggregate funded ratio to a high point for the year for the second consecutive month and remains over 90% funded for the second time since the end of November 2013.”

October Three reported that the gains in August marked five consecutive months of improvement for pension finances. Both model plans that October Three tracks gained ground in August, with traditional Plan A improving almost 1% and the more conservative Plan B gaining just under 1%. For the year, Plan A is more than 8% ahead, while Plan B is up almost 2%.

Aon said the funding level of pension plans sponsored by S&P 500 companies increased to 89.4%, up from 88.8% in July. Pension asset returns were positive throughout August, ending the month with a 1.2% return. Year to date, the aggregate funded ratio for U.S. pension plans in the S&P 500 improved by 85.6% to 89.4%, according to the Aon Pension Risk Tracker. The funded status deficit decreased by $96 billion, which was driven by a liability decrease of $119 billion, offset by asset declines of $23 billion year to date.

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