Administration March 1, 2013

Retirement Plans a Major Vehicle for Owning Mutual Funds

March 1, 2013 (PLANSPONSOR.com) – In 2012, 72% of households owning mutual funds owned them through employer-sponsored retirement plans.
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A research report from the Investment Company Institute (ICI) indicates nearly half of mutual fund-owning households held funds through multiple channels in 2012. Seventeen percent of mutual fund-owning households held mutual funds both inside employer-sponsored retirement plans and through investment professionals; 5% owned mutual funds both inside employer-sponsored retirement plans and through the direct market channel; and 10% held mutual funds through investment professionals and the direct market channel. Thirteen percent owned funds through all three channels.  

Older mutual fund-owning households tend to own mutual funds outside of employer-sponsored retirement plans. In 2012, 73% of mutual fund-owning households age 50 or older held mutual funds outside of employer-sponsored retirement plans, with 82% of these owning mutual funds through investment professionals. In contrast, 57% of younger mutual fund-owning households held their funds outside of employer-sponsored retirement plans. In addition, 27% of older mutual fund-owning households held funds only in employer-sponsored retirement plans, compared with 43% of younger mutual fund-owning households.  

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The research, which examines ownership of mutual funds through investment professionals, found more than half of mutual fund-owning households owned funds purchased through investment professionals. In 2012, 53% of households owning mutual funds held funds purchased through the investment professional channel, which includes registered investment advisers (RIAs), full-service brokers, independent financial planners, bank and savings institution representatives, insurance agents and accountants. Thirty percent owned funds purchased through the direct market channel, which includes fund companies or discount brokers.  

Mutual fund-owning households with ongoing advisory relationships tended to be headed by slightly older individuals and were more likely to have greater household financial assets than households without advisory relationships. The median head of household age for mutual fund-owning households with ongoing advisory relationships was 52, compared with a median age of 49 among households without ongoing advisory relationships.   

Median household financial assets for mutual fund-owning households with advisory relationships were nearly double that of their peers without advisory relationships. Mutual fund-owning households with female decisionmakers were more likely to have ongoing advisory relationships than households with male decisionmakers.  

The research report, “Ownership of Mutual Funds Through Investment Professionals, 2012” is at http://www.ici.org/pdf/per19-02.pdf.
Administration March 1, 2013

Falling Interest Rates Still Hurting Pensions

March 1, 2012 (PLANSPONSOR.com) – An increase in assets was accompanied by an even larger increase in liabilities in 2012 for the 19 publicly listed U.S. corporations with worldwide pension liabilities of more than $20 billion.
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According to an analysis conducted by Russell Investments, the “$20 billion club,”—a group that represents nearly 40% of the pension assets and liabilities of all U.S. listed corporations—started their 2012 reporting years with a combined net pension deficit of $182 billion and ended with a deficit of $220 billion.    

The main reason for the increase in the size of the deficit was the fall in the discount rate used to value liabilities, which in turn was largely a result of a decline in yields on corporate bonds. Despite four consecutive years of good asset performance since 2008, the overall deficit in the $20 billion club rose by roughly $84 billion during that time—almost entirely due to the downward trend in interest rates.  

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Although the combined pension deficit is at an all-time high, there are some positives, according to Bob Collie, chief research strategist, Americas Institutional at Russell Investments. “Interest rates can only go so low,” he said. “In the past six months, we’ve seen discount rates edge up by about half a percentage point, and a good part of that has come since the turn of the year. The downward trend over the past few years has hit pension plans hard, and if that trend has finally ended, that would be very welcome news. A lot of people are hoping that this does not prove to be a false dawn.”  

In a related blog posting “Piling on the pain at the $20 billion club”, Collie also notes the silver lining that it is cheaper for corporations to raise money by issuing debt when interest rates are low. Several have chosen to do recently, in part to help fund their pension plans.   

Corporations are responding to the challenges in their pension plans by reconsidering their benefit strategies, funding strategies and investment strategies. “These are the corporations with the largest dollars at stake, but the same challenges are found at just about every corporation with a pension plan,” added Collie. “Ultimately, what is happening among these plans is a restatement of objectives and a move toward multiasset investment strategies that better reflect the desired outcomes. All of the other trends that have been noted among pension plans—from de-risking to liability-driven investing [LDI] to volatility management—find their origins in this recognition of just how significant the plan’s impact can be on the sponsoring corporation.”   

Russell’s research report can be downloaded from here.

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