Data and Research June 25, 2024

DC Plan Investors Allocating to Cash Because of ‘Fear’

Anxiety could keep investors from participating in equity market gains and growth, Schroders data shows.

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Retirement plan participants are confused about their investments and where to allocate assets.  

Figuring out how to invest their defined contribution assets is driving DC plan participants to invest emotionally to withstand their worst fears, 2024 data from Schroders suggests.

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More than one-quarter (28%) of defined contribution plan participants reveal they are oblivious to how their retirement assets are invested, finds the Schroders 2024 U.S. Retirement Survey.

Among participants who do know where their assets are allocated, investing across workplace plans, IRAs and other retirement accounts the research suggests they are investing emotionally, states Deb Boyden, head of U.S. defined contribution at Schroders, in a press release.

Retirement participant’s fear allocation may keep investors from participating in equity market upturns and periods of asset growth, states Boyden.

“Fear can hold us back in many different aspects of life—including retirement planning,” she said, in a press release. “For savers with long-term horizons, large cash allocations create an opportunity cost that prevents you from taking advantage of the powerful benefits of compound growth.”

“To mitigate ‘fear allocation’ tendencies,” says Boyden in response to a question from PLANSPONSOR, “plan sponsors can offer smarter, professionally managed solutions designed specifically for participants approaching or in retirement.”

She said such offerings would help to “transfer the responsibility of asset allocation from participants to investment professionals who manage portfolios daily.”

Participants benefit from “in-plan products that handle asset allocation, … reducing the anxiety and potential missteps associated with self-directed investing, which as our survey has found, typically includes an overallocation to cash. “

Plan participants who currently participate in a workplace retirement plan allocate their portfolios in the following proportions, according to Schroeder’s data:

  • Equities, 29%
  • Cash, 28%
  • Fixed income, 19%
  • Target-date funds, 16%; and
  • Other, 8%

Fear was the most common reason for holding cash, the survey found. Two-thirds of plan participants allocated to cash because they fear losing their assets if the stock market slumps and 24% said they are unsure how to invest cash.

Seventy percent of DC plan participants said their workplace plan is their single most important retirement asset, 59% wanted more guidance from their employer on how to invest plan assets and 42% are working with a financial adviser, the survey finds.

Plan Participants Are Losing Sleep

Plan sponsors have opportunities to assist DC plan participants because of their fears, Schroeders’ survey finds.

Although approximately half (49%) of plan participants say the value of their retirement assets increased in 2023, 40% reveal they are not aware of how to protect the gains, 60% of participants feel they worry excessively about money and 39% have lost sleep because of worrying about their finances.

“There is a clear and present need for innovative retirement savings solutions that offer workers greater certainty and less volatility,” added Boyden. “With people living longer and the safety net of corporate pension plans gone for so many, investors need solutions that provide an opportunity to grow their assets and mitigate losses in the event of a downturn.”

The Schroders 2024 U.S. Retirement Survey was conducted by 8 Acre Perspective among 2,000 U.S. investors nationwide ages 28 to 79 years old, including 780 Americans who currently participate in a workplace retirement plan. The survey was conducted from March 15 to April 5, 2024.

Compliance June 24, 2024

DOL’s Late IB 95-1 Report Concludes More Time Is Needed

The long-awaited report makes no recommendations for changes.

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The Department of Labor Monday published its long-awaited report on Interpretative Bulletin 95-1, which outlines the process the defined benefit plan fiduciaries must use when selecting an annuity provider to which the plan will transfer pension obligations. The report summarized meetings and discussions with stakeholders and concluded the DOL is “not prepared at this time to propose amendments to the Interpretive Bulletin” however, the report indicates that the department could consider changes to the bulletin warranted in the future. 

“[Employee Benefits Security Administration] has not concluded that changes to the Interpretive Bulletin are unwarranted,” the DOL wrote in the findings section of the 29-page report.

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“Today’s report is the result of an extensive and thorough review, including more than 40 stakeholder meetings on this topic and input received through our consultation with the ERISA Advisory Council,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “We look forward to further exploration of the issues and concerns raised during the process, so that we can consider what next steps may be necessary to guide fiduciaries considering a pension risk transfer for their defined benefit pension plans, so that the fiduciaries can meet their obligations to participants and beneficiaries.”

IB 95-1 is a guidance document issued in 1995 by DOL that describes what fiduciaries operating under the Employee Retirement Income Security Act must consider when selecting an insurer as a pension risk transfer provider to be sure that the provider is safe one. The six criteria include:

  1. The insurer’s investment portfolio
  2. Size of the insurer relative to the size of the PRT contract
  3. Level of insurer’s capital and surplus
  4. Other lines of business of the insurer
  5. Structure and guarantees of the contract
  6. Additional protection offered by state-level guaranty associations

The report, required by Section 321 of the SECURE 2.0 Act of 2022, summarizes potential shortcomings of IB 95-1 that were identified by stakeholders in more than 40 meetings with the DOL in consultations with the ERISA Advisory Council last July, without making any recommendations itself.

Some of the key issues highlighted by stakeholders, DOL wrote, included private equity ownership of PRT providers, offshore reinsurance agreements, and administrative capacity. Pension risk transfer activity has been increasing in recent years as the funding levels of corporate pension funds as risen due to interest rates and investment performance.

The report read: “stakeholders had a global concern that private equity-owned insurers may not intend to be in the insurance business for the long term and, by definition, annuities are long-term commitments. These stakeholders questioned whether private equity firms would have policyholders’ interests at the forefront.”

Mark Unhoch, pension risk transfer practice leader at consulting firm October Three, says that the administrative capacity “should be part of IB 95-1.” Elements such as “customer service, checks coming on time, making changes online or elsewhere,” become critical services for an insurance company to offer when they take over a pension, and IB 95-1 as currently written is silent on whether a pension fiduciary should even consider it.

Congress in SECURE 2.0 required the report to be finished by December 29, 2023, 178 days ago. All the same, the report concludes: “Further exploration into developments in both the life insurance industry and in pension risk transfer practices is necessary to determine whether some of the Interpretive Bulletin’s factors need revision or supplementation and whether additional guidance should be developed.”

 

 

 

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