Can Adding Private Equity to TDFs Boost Performance?

Including private equity into the asset class mix of a DC plan participant’s TDF could generate additional savings of $484,168, according to a new study.

Adding private equity to a custom target-date fund (TDF) could improve expected returns without incurring significant risk, according to a study by Pantheon, a private equity and real assets investor.

The firm found that a defined contribution (DC) plan participant could potentially increase savings distributable by about 8.7% at the funds maturity in year 45 by adding private equity, generating a potential return with an additional $172,794—assuming an annual investment of $6,424 through the fund’s lifespan.

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The study suggests that annual savings of $12,000 could generate additional savings of $322,779; and annual savings of $18,000 could lead to additional savings of $484,168.

Furthermore, the firm found that higher allocations to private equity during the first 30 years could enhance the fund’s performance even further. Pantheon defined the optimal allocation as 7.1% during the first 30 years of the TDF, followed by an allocation of 6.98%, 6% and 5.28% in years 30, 35 and 40 respectively. Of course, past performance is no guarantee of future returns.

As reference data, Pantheon turned to the assumed forward returns of the JP Morgan Asset Management 2016 Long-Term Capital Market Assumptions. This annual publication outlines expectations of how risk, return, and correlations across asset classes may develop through coming decades. Pantheon took this approach “because it is more conservative than using historical returns as the J.P. Morgan forecasts factors in declining excess private equity returns.”

The research team drew TDF glide path data from Fidelity Investments. The firm notes “The TDFs we sourced from Fidelity had maturity dates between 2020 and 2060. Since the maturity dates of the sourced TDFs lie in the future, the glide path data represents Fidelity’s current expectations of future asset allocations.” The team then added Private Equity into the TDF asset class mix to examine whether its inclusion could significantly increase expected returns without changing the TDFs risk profile.

The full study can be found at Pantheon.com

Six Health Care Trends to Follow in 2017

The National Business Group on Health has released six trends for 2017, in response to past trends and growing concern about the Affordable Care Act’s potential repeal.

With just days into the New Year and two weeks until the presidential inauguration, uncertainty over the future of the Affordable Care Act (ACA) is growing. In response, the National Business Group on Health (NBGH) has released a list of six health care benefit trends to keep an eye on in 2017, catered to corporate human resources and finance executives.

The non-profit association, which holds 420 large U.S. employers, questions the fate of the ACA, pharmacy pricing and proposed health plan mergers, among others.

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The first trend asks if 2017 will see the ACA being repealed and replaced under the Trump administration. While the association notes how public exchanges have experienced heightened average premium surges and less insurance options, a repeal of the ACA may result with insurers leaving the exchanges to evade being the ‘last man standing,’ according to NBGH. Since the group believes tax on employer plans; employer mandate; and reporting and administrative requirements should be ceased, there will be close monitoring on its repeal.  

Furthermore, the second trend raises questions on President-elect Trump’s appointment of Representative Tom Price (R-Georgia) as secretary of the Department of Health and Human Services (HHS), and whether different payment options to the present fee-for-service system will continue to be prioritized. The association emphasizes the public- and private-sector’s need to turn to value-based payments in order to transform health care delivery; and mentions how a repeal of the ACA and changes in accessibility without delivery reformation will not address existing high costs or long-term affordability of health care.

“We’re seeing an increased focus on opportunities looking to positively impact health care delivery,” says Steve Wojcik, vice president of Public Policy at NBGH. “Focusing on the delivery side, whether it’s expanding centers of excellence, looking at accountable care organizations, primary care medical home, offering telehealth, and offering tools to help employees shop for more effective, more efficient providers when they do need a service.”

On the fate of proposed plan mergers for 2017, such as Aetna/Humana and Anthem/Cigna, NBGH weighs arguments pro and con for the partnerships in the third trend. According to the association, arguments for the merges include greater influence in negotiating with providers; accelerating the move to alternative payment models; and reducing overall costs. However, those against the merge argue this would result in a gradual change and innovation prevention.

Due to increased prices on generic, compound, brand, and specialty medications, the fourth trend focuses on advanced risk-sharing and value-based pricing models in 2017 for pharmaceuticals. NBGH mentions that while only 2% of the population consumes specialty drugs, expenditures continue to surge the fastest in health care spending, making specialty medication the top driver of overall health care costs for many employers. The association describes the current pricing model as “antiquated,” “unsustainable,” and “unaffordable,” and has stated how politicians and the public have criticized the model.

“There’s more aggressive utilization management and other changes establishing specialty pharmacy tiers to make sure plans are spending on specialty pharmacy medications as wisely as possible, for people that need it, as opposed to possibly trying to control the waste and unnecessary use for these very expensive medications,” says Wojcik.

Support services for consumer engagement and rising employer interest in workforce well-being cover trends five and six, both stepping in among the aims for 2017.  

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