Deals and People February 7, 2020

Retirement Industry People Moves

Senior compliance counsel joins Hall Benefits Law legal team; TRA hires MEP specialist; Morningstar acquires Hueler's stable value database and index; and more.

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Art by Subin Yang
Art by Subin Yang
Art by Subin Yang

Alliance for Lifetime Income Announces New Institute

The Alliance for Lifetime Income announced the establishment of the Retirement Income Institute. 

The institute’s leadership includes co-chairs Jon Forman, Leora Friedberg and Barry Stowe, and Steve Harris as senior adviser.

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“We’re excited and proud to launch this new institute, which brings together some of our country’s leading scholars to collaborate with the Alliance’s member companies to find innovative ways to tackle retirement income security in America today,” says Jean Statler, executive director of the Alliance. “I believe two things will differentiate this institute from many other great retirement research organizations: our specific focus on protected retirement income, and the ability to combine scholarly research and thinking with real-world data and the practical expertise and experience of the retirement industry. Every day, the institute will be focused on overcoming roadblocks to connecting protected lifetime income with the retirement needs, goals and aspirations of consumers.”

“Through the Retirement Income Institute, the Alliance will have the opportunity to identify and address barriers to delivering protected income, and build a foundation for future innovation to help our best thinkers decipher some of the intractable problems in our industry,” says Barry Stowe, co-chair of the Institute’s Retirement Industry Advisory Group. “We want to unearth solutions that help more Americans retire with less risk, more confidence and real financial security to live the life they want in retirement.”

The institute has announced the four topics that will constitute its 2020 research agenda: new approaches to the annuity puzzle; optimizing annuities in a retirement portfolio; private sector solutions for legal and regulatory barriers to annuities in 401(k) plans; and understanding differences in consumer behavior and decision-making.

A Scholars Advisory Group will also be formed and led by co-chairs Friedberg and Forman, and include the following scholars and academic thought leaders:

  • Andrew Biggs, resident scholar, American Enterprise Institute
  • Annamaria Lusardi, Denit Trust Endowed Chair of Economics and Accountancy, George Washington University School of Business;
  • Ben Harris, Alliance fellow; executive director, Kellogg Private-Public Interface, Northwestern University;
  • Bill Gale, Alliance fellow; Arjay and Frances Miller Chair in Federal Economic Policy and senior fellow in the economic studies program, Brookings Institution;
  • Gopi Shah Goda, Alliance fellow; senior fellow and deputy director, Stanford Institute for Economic Policy Research;
  • Jason Fichtner, Alliance fellow; senior lecturer, associate director, Johns Hopkins University School of Advanced International Studies;
  • Julie Agnew, Richard C. Kraemer Term Professor of Business, William & Mary School of Business;
  • Michael Finke, Alliance Fellow; dean and chief academic officer, The American College of Financial Services;
  • Nora Super, senior director, Milken Institute Center for the Future of Aging; and
  • Wade Pfau, Alliance fellow; professor of retirement income, The American College of Financial Services.

Senior Compliance Counsel Joins Hall Benefits Law Legal Team

Senior Compliance Counsel Eric Schillinger has joined the legal team at Hall Benefits Law (HBL).

Schillinger has broad employee benefits legal compliance experience with qualified retirement plans, health and welfare plans, and executive compensation. His resume, built at law firms Trucker Huss and Miller Nash Graham & Dunn, includes drafting required disclosures, handling IRS, Department of Labor (DOL) and other audits, analyzing VEBAs, and other responsibilities. He has written articles and been quoted by Bloomberg Law.

Schillinger has relocated from Denver, Colorado, to join the HBL team.

TRA Hires MEP Specialist

The Retirement Advantage Inc. (TRA) has welcomed Trey Galuppi as TRA’s Multiple Employer Plan (MEP) specialist. He will report to Jeff Schreiber, TRA’s director of sales. 

Galuppi will primarily be responsible for working with TRA’s Regional Sales Consultants (RSCs), focusing on the overall expansion of the firm’s consulting capabilities in the areas of group sponsored plans. This will include Professional Employer Organizations (PEOs), Pooled Employer Plans (PEPs), Multiple Employer Aggregation Programs (MEAPs), and Producer Group Organizations (i.e. Planner Groups, CPA Firms, P&C Firms, etc.) in an effort to align these plans with recordkeeping partners and distribution organizations that use TRA services.

“We are excited to have someone of Trey’s acumen and experience joining our team,” Schreiber says. “Trey possesses an established track record of working with consultants and plan sponsors who have concentrated in this market. His experience will help us deliver superior services and deepen our relationships with our partners nationwide who are interested in this line of business.”

Galuppi graduated from Florida State University with a bachelor’s in English language and literature. He holds a FINRA Series 6 license as well as his 2-15 Life, Health and Variable Annuities license. 

Spectrum Investment Advisors Announces Multiple Promotions and Hires

Spectrum Investment Advisors Inc. has promoted three employees and added one relationship manager. 

Scott Schwartz has been promoted to senior relationship manager. He joined the firm in 2014 as a relationship manager and has been in the retirement services industry since 1994. Schwartz is responsible for plan investment reviews, employee educational meetings and one-on-one investment consultations. He holds an Investment Adviser Representative license (Series 65) and is a board member of the Wisconsin Retirement Plan Professionals Ltd. and a member of the National Association of Plan Advisors.

Suzanne Weeden was promoted to senior relationship manager. Weeden joined the firm in 2014 as a relationship manager and has been in the retirement services industry since 1999. She is responsible for retirement plan investment reviews, plan design discussions, employee educational meetings and one-on-one investment consultations. Weeden holds an Investment Adviser Representative license (Series 65) as well as the following designations: Accredited Investment Fiduciary, Retirement Plans Associate and Certified Employee Benefit Specialist. She is also a current member and former board member of the Wisconsin Retirement Plan Professionals Ltd. and a member of the National Association of Plan Advisors.

Daniel DeDecker has been hired as relationship manager. He earned a bachelor’s degree in finance and financial management services from the University of Wisconsin-Milwaukee and has had experience in the retirement services industry since 2013. Prior to joining Spectrum, DeDecker was an adviser at Alpha Investment Consulting Group LLC where his role included providing guidance to plan sponsors on fiduciary responsibilities, investment policy statement construction, plan structure, investment manager selection/performance monitoring and recordkeeper selection.

Paul Minick was promoted to full-time account manager, responsible for developing educational plans and providing one-on-one investment consultations to plan participants. He holds an Investment Adviser Representative license (Series 65) as well as the Certified Personal Finance Counselor designation.

Industry Veteran Joins Lockton

Vinny Catalano has joined Lockton Pacific Series.

Catalano’s expertise is grounded in nearly two decades of leadership in the employee benefits industry, where he has maintained long-term relationships with clients in the nonprofit and private sectors, including credit unions, chambers of commerce and professional services firms, as well as construction companies and manufacturers. He served as area senior vice president for Arthur J. Gallagher before joining Lockton, and specializes in total benefits rewards consulting, health care funding, benefits administration, compliance, wellness program development and employee communications.

“As health care costs continue to rise, compliance becomes increasingly complex, and employees look to relocate out of state for more affordable housing, Vinny’s expertise will be a tremendous asset to employers to more effectively manage costs, design plans and communicate the value of those plans to drive employee engagement and retention,” says Alex Michon, executive vice president and head of Lockton’s Sacramento office.

“Considering he has some of the strongest relationships with carriers and health care providers in the region, his access to senior level people also gives Vinny the ability to cut through the challenges employers face in navigating the health care system and solve their problems more effectively,” Michon adds.

Catalano is part of the Lockton’s Pacific region, which encompasses eight offices throughout the western United States including Portland, Oregon; Sonoma, California; San Francisco; Sacramento, California; Encino, California; Los Angeles; Irvine, California; and San Diego.

CBIZ Acquires Assets from Pension Dynamics

CBIZ Inc. has acquired assets from Pension Dynamics (PD), effective February 1.

PD is a full-service retirement and benefits plan adviser providing 401(k), 403(b), 457(b), defined benefit (DB), cash balance, profit sharing, and flex, COBRA, health reimbursement and commuter plans to clients in the San Francisco Bay area. PD has 25 employees and approximately $3.6 million in annual revenue.

Jerry Grisko, president and CEO of CBIZ, states, “The acquisition of Pension Dynamics strengthens our position as one of the nation’s premier retirement planning service providers by expanding our advisory capacity on the West Coast. As the fourth such acquisition in our retirement planning business within the past two years, we continue to invest in and grow this business along with our presence in California. We welcome Melanie and the entire Pension Dynamics team to the CBIZ family and look forward to working with them to provide exceptional services to our clients.”

Melania Budiman of Pension Dynamics says, “We are very excited to join CBIZ. The synergy of our services and culture will significantly enhance our opportunities to serve our clients.”

Morningstar Acquires Hueler’s Stable Value Database and Index

Morningstar, Inc. has acquired Hueler Analytics’ Stable Value Comparative Universe Data and Stable Value Index. Terms of the transaction were not disclosed.

Founded in 1987 in Minneapolis, Minn., Hueler is an independent data and research firm providing reporting and systems designed for the annuity and stable-value marketplace. Hueler Analytics’ distribution encompasses advisers, investment managers, product providers, plan fiduciaries, and consultants. Hueler Analytics’ Stable Value Comparative Universe Data provides broad market coverage of stable-value investments, including stable-value pooled funds, insurance company separate accounts, and general account products.

“Stable-value funds have long played an important role in helping retirement plan participants accumulate ­retirement savings and already account for 10 percent of assets in defined-contribution plans. While largely invested in fixed-income securities, stable-value funds are designed to provide steady, predictable returns that exceed money market investments over time and are protected from any loss of capital or interest through contracts from an insurance company or bank,” says Joscelyn MacKay, director of data products for the Americas at Morningstar. “Investment professionals across all market segments have relied on Hueler Analytics for accurate, detailed, and comprehensive analysis of stable-value data. Its addition to Morningstar will help us to continue illuminating investing across all types of securities and help people achieve a successful retirement.”

Hueler’s founder, Kelli Hueler, and managing director of Operations Kathleen Schillo, will serve in a consulting role to support the transition of Hueler Analytics’ Stable Value Comparative Universe Data and Index to Morningstar.

“We are proud of the reputation Hueler Analytics has built for exceptional data integrity and reporting on stable-value funds. It’s gratifying to see these products we’ve developed with strong industry support over the past 30 years move into the capable hands of the Morningstar team,” says Hueler. “We have the utmost confidence that Morningstar is the best firm to continue this commitment and advance the future of stable-value data and reporting.”

Investing February 7, 2020

Don’t Put Your Head in the Sand Because of Cash Balance Liability Complexity

Cash balance plans may have the most complex liabilities to manage, but creating a clear strategy to manage risks will keep it from getting more complicated.

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In its U.S. Pension Market Quarterly Outlook, Insight Investment looks at what it calls generally the most complex pension liabilities of all—cash balance plans—and how they can be managed in practice.

Kevin McLaughlin, head of liability risk management with Insight Investment in New York City, says this matters because most of the firm’s clients are on the path to de-risking their plans, and, as they get farther down the path, managing assets to liabilities gets more important—unhedged liability risks become a bigger component of residual risk. “If they’ve done all the hard work to get their defined benefit plan funded status to 100%, they want to make sure things are locked down to have more certainty of outcomes,” he says. “They may have ignored these risks in the past.”

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McLaughlin adds that many plan sponsors, as they’ve reconstructed their benefit plans and frozen their traditional defined benefit (DB) plans in the last couple of decades have, in a number of cases, introduced a cash balance component. “It is quite common to come across a cash balance benefit in DB plans,” he notes.

The way a cash balance plan works is that a defined contribution (DC) type of payment is contributed to employers to cover their benefit balance, an interest crediting rate—chosen by the plan sponsor—is applied to participant account balances, and, at retirement, participants can typically take a lump-sum distribution or select an alternative annuity benefit. According to the Insight Investment report, this creates “three distinct, but interrelated, uncertainty risks in cash balance plans: lump sum optionality, duration risk (including liquidity), and interest crediting.”

Lump Sum Optionality Risk

McLaughlin explains that plan sponsors do not know with any great certainty which form of payment they will have to pay to participants, and they need to be prepared to deliver either a lump-sum distribution or an annuity. This create a hedging and liquidity challenge in managing the asset, as the duration of a lump-sum payment is zero, while the duration of an annuity can be 10 or 15 years; and the amount of the liability itself can change depending on the form of payment, with one benefit cheaper than the other on a present-value basis.

According to the Insight Investment report, the annuity benefit is more valuable if the interest rate used to calculation the annuity conversion is below prevailing market rates; and conversely, the lump sum is the more valuable option when the annuity conversion rate is higher than prevailing market rates. This can certainly influence a participant’s choice between a lump sum and an annuity. In addition, McLaughlin says there is an extra potential cost factor for the plan sponsor: as faced with a choice of benefit form, participants who think their life expectancy is low may consider taking a lump sum, while those who think they will live a long life will typically take an annuity. Hence, the expected duration of annuities may be longer than for a typical retiree pool.

That said, he notes that in practice from year to year, the typical take-up rate for lump sums versus annuities tends to be pretty steady, though the previously mentioned factors can affect that. Plan sponsors should set up their portfolio to prepare for both types of payments.

What this looks like, McLaughlin says, is a portfolio with a high degree of liquidity to be able to pay someone out quickly if needed. “There is no perfect investment or hedge to meet the lump sums or annuity payment option,” he says. “But we would suggest a combination of cash bonds and a derivative overlay strategy to balance the liquidity and potential duration needs. If it turns out more participants take lump sums than expected, plan sponsors can take away some of the duration hedge.”

Duration Risk

“If the interest rate used to calculate the annuity is somehow indexed to current rates, we believe the risk is much less to the plan sponsor. But even when this is the case (it often isn’t), there can still be problems: 1) plans that have converted to cash balance will often have a legacy defined benefit which serves as a minimum that may not be lowered regardless of changes in rates; and 2) hedging the risk means keeping the duration of the portfolio very short, which may cause portfolio earnings to be inadequate,” the report says.

While there are different ways to set the plan’s crediting rate based on the Employee Retirement Income Security Act (ERISA) safe harbor, McLaughlin says a typical scenario is to use the yield on the 30-year Treasury bond, often combined with a floor of 3% or 4%. The problem is, there is “no investment we can find that will give a return like the yield on the 30-year Treasury bond, so the only way to manage the liability risk is dynamic hedging, which changes as the interest rate changes,” he notes.

McLaughlin explains that if the interest rate is low, the investment goal is clear. Plan sponsors should find an investment strategy that delivers a 4% return—with a profile that looks like the liability. If the interest rate rises, there’s a possibility the crediting rate will be greater than 4%. In that case, plan sponsors should find investments that mirror the possibility of the interest rate on the 30-year bond and implement an appropriate investment and hedging strategy.

“Plan sponsors may jump to the conclusion that they should buy a 30-year Treasury bond, but they don’t get the yield unless they hold it for more than 30 years. It won’t produce the annual return needed, so it is not a good hedge,” McLaughlin adds.

Interest Crediting Risk

The report goes on to note that “if the crediting rate is fixed, the plan may invest to lock in earnings to cover that rate to the extent possible (subject to credit quality constraints). If the rate varies, the asset-liability mismatch risk can be addressed by keeping the investment portfolio’s duration very short.”

But, it says, the most difficult situation is for those plans with crediting rates that are the greater of a fixed rate and an indexed rate. “The plan is effectively short an option, which will be difficult and or expensive to hedge—especially in an environment where the fixed and variable rates are close to each other.”

McLaughlin says there are a range of interest crediting rates in cash balance plans. Other than the most common one previously mentioned, some use the yield on the one-year Treasury rate fixed return, and others link to corporate bonds and Treasury bonds. “Our general advice is simple; the first port of call is to understand the materiality of the risk. In some cases, it may be very small. If so, we would advise plan sponsors to monitor the risk and if it grows, take action. There’s no need to complicate things with the investment strategy,” he says.

“If the risk is much bigger, effectively, plan sponsors would need a more dynamic hedging strategy that reflects the yield on the market or interest rates. An ideal portfolio has a combination of bonds and derivative overlays,” McLaughlin adds.

Collaboration Is Necessary

Dealing with liability complexity in cash balance plans does require a closer collaboration between investment managers and actuaries, McLaughlin says. “What you want from the actuary is projected cash flows—just as you’d want for a final-average-pay DB plan. But, for cash balance plans, you want more information—the expected liquidity profile and also a profile of benefit lump sums versus annuities,” he says. “There should be a discussion around the sensitivity of interest rates and how the liability can change or move if the assumed take-up rate for lump sum or annuity distributions changes. The actuary has this data and knows participant behavior well.”

Regarding interest crediting rate risk, McLaughlin says because there is no single agreed-upon way to solve or hedge the problem, the best way forward is to have a discussion between the actuary and investment manager or in- house chief investment officer (CIO) team to make sure everyone understands the risks and the risk tolerance of the plan sponsor, and to find a solution everyone can understand and monitor over time.

“Some plan sponsors may ignore the liability risks in cash balance plans because of the complexity,” McLaughlin says. “Our advice would be that this is not something you should ignore. Invest the time to understand the risks and create a clear strategy. Reach decisions through information and analysis.”

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