Case Study Shows Value of Re-Enrollment

One year after a re-enrollment, the ‘stick’ rate of investment in the default fund remains high, even when some participants partially opted-out, Vanguard found.

One year after a re-enrollment event, most participants remain invested in the default fund, Vanguard found in a case study.

Early in 2016, Vanguard examined the impact of a re-enrollment event within a large defined contribution (DC) plan, analyzing participant behavior immediately after the event and then six months later. It extended its analysis to study the behavior of the same participant cohort one year after the event.

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The original re-enrollment event occurred in two phases, beginning in December 2014 during the transfer of a large DC plan’s recordkeeping services to Vanguard. Because of the presence of a stable value investment fund, which required advance notification to the insurer, the full re-enrollment was not completed until June 2015.  After one year, the plan menu remained consistent in terms of the styles and number of funds offered; however, the bond funds and one stable value offering were changed.

Immediately after phase 1, at the end of December 2014, 10% of participants partially or fully opted out of the default fund and elected their own portfolios. After phase 2, this percentage increased slightly. One year later, 20% of participants were no longer solely invested in the default fund. However, Vanguard finds most of the increase is observed among participants who moved part of their portfolio out of the target-date default, and the percentage of participants who fully opt out remains low over the entire one-year period.

Vanguard notes that after the two-phase re-enrollment event, the trajectory of the median equity allocation aligned more closely to the target-date series. The distribution or variation around the glide path, representing individuals who chose to deviate from the single target-date default fund, grew wider as participant age increased. This widening of the distribution reflected later-than-normal retirement ages anticipated by some older investors, Vanguard found.

Six months after the re-enrollment, 94% of participants and 74% of plan assets were in target-date funds (TDF)s. One year later, 92% of participants and 81% of plan assets were in TDFs.

Vanguard concludes, “Over time, investment defaults remain ‘sticky.’ This reinforces our findings that re-enrollment is an effective strategy to improve portfolio diversification.”

A report about the case study can be found here.

Did Positive Returns Help Pension Plans in January?

Whether good market returns in January helped pension plans’ funded status depends on who you ask.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained relatively level at 82% at the end of January 2017 as compared to the end of 2016, according to Mercer.

The positive equity returns in January were not enough to move the needle last month as discount rates remained relatively flat. As of January 31, 2017, the estimated aggregate deficit of $400 billion decreased by $8 billion as compared to the $408 billion deficit measured at the end of 2016.

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”January is another reminder that equity returns alone will likely not improve the funded status of pension plans,” says Jim Ritchie, a partner in Mercer’s retirement business. “Many pension plans have large exposures to fixed income assets with durations much shorter than the liabilities, resulting in a significant bet on interest rates going up in the future. While most pundits believe interest rates will go up in the long run, it is the short run that creates havoc on plan sponsors’ balance sheets and income statements. Another interesting development this year will be the release of the Financial Accounting Standards Board’s update for recognizing pension expense. This update may result in a reduction in the amount of expense recognized as operating expense with the remaining amount essentially falling ‘below the line’. These two issues should encourage plan sponsors to re-think their asset allocation strategies for their pension plans.”

However, according to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 1.2 percentage points to end the month of January at 83.2%, up nearly 5 percentage points over the trailing twelve months. 

Wilshire says the monthly change in funding resulted from a 1.2% increase in asset values and a slight decrease in liability values. 

Asset values increased due to positive returns for most asset classes during the month. The liability value decreased due to a small increase in corporate bond yields. “January marked the fifth consecutive month of rising funded ratios, which has contributed to January month-end funded ratios being the highest since November 2015,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “This month’s increase was primarily driven by the continued post-election increase in equity markets increasing the Wilshire 5000 Total Market Index by nearly 1.8% during January.”

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