Data and Research July 7, 2016

Cash Balance Plans Continue to Be Attractive Option for Employers

Kravitz found a 19% year-over-year increase in new cash balance plans, compared to 2% for new 401(k)s.
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New research released by retirement plan services firm Kravitz shows strong growth in the cash balance plan market, which just topped $1 trillion in total invested assets.

“The milestone caps a decade-long trend of double-digit annual growth, with cash balance plans becoming an increasingly important sector of the retirement market and traditional defined benefit plans declining,” the firm explains. “Cash Balance plans now make up 29% of all defined benefit plans, up from 2.9% in 2001.”

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According to Kravitz, there were 15,178 cash balance plans active in 2014, the most recent year for which complete Internal Revenue Service (IRS) reporting data is available. The 19% year-over-year increase surpassed already-optimistic industry projections and significantly outpaced the 401(k) market which showed just a 2% increase in new plans,” researchers note, “despite positive economic trends and job growth.”

“With 401(k) contributions limited to $18,000 and tax rates increasing, cash balance plans are an increasingly popular choice for many employers,” says Dan Kravitz, president. “They can typically double or even triple their tax-deferred savings while enhancing retirement benefits for employees, a key factor for attracting top talent in a competitive hiring market.”

The research finds the “hybrid” nature of cash balance plans is appealing for both employers and employees, as such plans “combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k).”

Interestingly, small businesses seem to be driving much of the new cash balance plan growth. Fully 91% of cash balance plans are in place at firms that currently have less than 100 employers, for example, with many of these employers citing favorable tax implications. From the employees’ perspective, these companies have more than twice the level of contributions to employee retirement savings when a cash balance plan is present. (The average employer contribution to staff retirement accounts is 6.5% of pay in companies with both cash balance and 401(k) plans, versus 3.1% of pay in firms with 401(k) alone.)

Also fueling the growth, according to Kravitz, are the recent IRS regulations allowing broader cash balance investment options. The “Actual Rate of Return” option and other new investment choices approved in the 2010 and 2014 Cash Balance regulations have been particularly influential, researchers explain, “making cash balance more flexible and more appealing to employers by removing many funding issues.” More than 8,000 new cash balance plans have been created in the wake of these regulations.

NEXT: Why small businesses favor cash balance plans 

What makes cash balance plans so attractive to small business owners?

Two of the main appeals, small business owners say, are cost efficiency and tax efficiency. “After staff costs, taxes are usually the largest expenditure for small businesses,” Kravitz researchers explain. “Cash balance plans help owners with a significant tax deduction for employee contributions, plus generous tax-deferred retirement contributions for themselves.”

Small business owners also appreciate the asset protection characteristics of cash balance plans: As with any IRS-qualified retirement plan, cash balance assets are protected in the event of a lawsuit or bankruptcy.

Further, small business owners like the idea of using cash balance plans to “catch up on delayed retirement savings.” According to the Kravitz research, the age-weighted contribution limits permitted by the IRS allow older owners to “squeeze 20 years of savings into 10 … Owners can typically double or triple their deferrals compared with a standalone 401(k).”

Finally, small business owners see cash balance plans as being more effective at attracting and retaining talented employees compared with a standard 401(k).

The full research report is here. 

Products July 7, 2016

Investment Product and Service Launches

John Hancock Investments enacts expense reductions in TDF suite; Defined Contribution Real Estate Council publishes investing checklist for plans; Morningstar introduces new global risk model.

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Expense Reductions in John Hancock Investments TDF Suite

John Hancock Investments announced “a sweeping package of expense reductions” aimed at providing cost savings to investors in its suite of target-date Retirement Living Portfolios, as well as in four other mutual funds.

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Andrew Arnott, president and CEO of John Hancock Investments, says the reductions will further ensure the firm’s funds are cost-effective for investors. “That is an important facet of our goal of maximizing the value we provide our mutual fund shareholders,” he adds.

The expense reductions and new breakpoint schedule cover the following funds:

  • John Hancock Retirement Living Portfolios – 9 bps reduction on all share classes across the suite.
  • John Hancock Enduring Assets Fund – 30 bps reduction on all share classes.
  • John Hancock Investment Grade Bond Fund – 8 bps reduction on all share classes.
  • John Hancock Strategic Income Opportunities Fund – Additional breakpoints added to the fund’s expense schedule to help shareholders benefit from lower costs as the fund grows.
  • John Hancock Value Equity Fund – 9 basis point reduction on all share classes.

Additional details of these new expense reductions and fee schedules can be found in the funds’ and portfolios’ latest prospectuses, the firm says, adding that the latest round of reductions mark the firm’s fifth set of expense cuts in the past four years—affecting more than 30 funds.

Additional information may be found at www.johnhancock.com.

NEXT: DCREC Publishes Investing Checklist for Plans

DCREC Publishes Investing Checklist for Plans

The Defined Contribution Real Estate Council (DCREC) has published a checklist for use by defined contribution (DC) plan sponsors and consultants considering the addition of private real estate as an investment option in their plans.

DCREC describes the checklist as an “evaluation tool created to help plan sponsors and their partners in evaluating private real estate options that could be incorporated into their plan’s overall investment structure.” The checklist incorporates a wide range of recommended questions on topics such as daily valuation, liquidity, investment strategy, product structure and investor eligibility, as well as the operational considerations involved in implementing private real estate strategies on existing record-keeping platforms. 

“Plan sponsors and their consultants continue to seek diversified portfolio options for their participants,” says Jackie Hawkey, who co-chairs DCREC’s Best Practices Committee. “Interest is growing in allocating to private real estate for uncorrelated diversification, often within customized target-date funds or as part of a multi-asset class portfolio. The purpose of this checklist is to give market participants a standard set of questions to ask product providers when considering adding the asset class. This will make it easier to assess and compare offerings to determine the best fit for a particular plan.”

Additionally, DCREC released a research paper on the “Ten Key Principles Recommended for Daily Valuation of Private Real Estate Investments.” DCREC says the publication is a guide to understanding best practices in valuation covers topics such as incorporating third-party appraisals, establishing an objective daily valuation process, recognizing the impact of material events, and using currently accepted methods for daily valuation.

“Daily valuation and liquidity are seen as two of the biggest areas of focus for DC sponsors who want to add private real estate as an investment option in their plans,” Hawkey concludes. “Together, our checklist and guide provide an excellent starting point for anyone hoping to learn more about how they can incorporate this important asset class into a DC platform.”

More information on both resources can be found be at www.dcrec.org.

NEXT: Morningstar Introduces New Global Risk Model

Morningstar Introduces New Global Risk Model

New global risk management models from Morningstar Inc. are designed to help investors with deeper analysis of stocks and equity portfolio characteristics.

The firm’s firm Global Risk Model takes into account 36 factors across style, sector, region, and currency characteristics to help investors understand an investment's factor exposures and to forecast the future return distribution of individual stocks and equity portfolios. The company plans to eventually expand the risk model to additional asset classes, it says.

Morningstar's Global Risk Model has 36 different factors that help decompose the sources of return and risk for a stock or a portfolio. Six of the 36 factors are based on Morningstar's proprietary ratings, including Quantitative Fair Value Estimate; Morningstar Quantitative Economic Moat Rating; Quantitative Uncertainty Rating; Quantitative Financial Health; Ownership Risk; and Ownership Popularity. A list of all 36 factors in Morningstar's Global Risk Model is available online here.

Warren Miller, head of asset management software for Morningstar, explains the model evaluates more than 40,000 stocks and 10,000 equity fund portfolios in Morningstar's database and then builds a comprehensive forecast of future returns for various time horizons based on all 36 factor exposures. In addition, the Global Risk Model can assess an equity portion of a client's multi-asset portfolio. Investors can screen individual stocks or equity funds or make comparisons based on any of the factors. Morningstar updates the factor exposures and forecasts daily.

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