Data and Research January 4, 2016

Conn. Study Says Retirement Plan Access Can Be Expanded

Under a range of market scenarios and plan designs, a public retirement program for private-sector employees would be viable in Connecticut, a report concludes.
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The Connecticut Retirement Security Board (CRSB) has submitted a report to the General Assembly recommending a number of initiatives to the legislature and the governor to address the issue of private-sector workers in Connecticut without access to a workplace savings plan.

The board was formed in 2014 to address the growing retirement crisis in Connecticut, with the goal of conducting a market feasibility study for implementing a public retirement plan and was required to report its findings by January 1.  

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The report details a proposed program account structure, governance and enforcement elements, a program model and the financial feasibility of such a program.

The program would likely serve, at a minimum, almost 600,000 Connecticut residents who have no access to workplace-based retirement savings. According to Connecticut-specific data from the Schwartz Center for Economic Policy Analysis at The New School, between 2000 and 2010, employers offering a retirement plan declined, from 66% to 59%. In other words, four out of 10 workers who live in Connecticut lack access to a retirement plan at work.

In developing a program model, the board focused on the policy goals of increasing retirement security through a low-cost prefunded retirement savings program that requires a minimal amount of financial sophistication, according to the report.

Businesses that currently already offer a 401(k) plan or other workplace-based retirement savings option to all employees would be unaffected by the proposed program. Participating employers would not have to contribute to the program—only provide a payroll deduction mechanism for employees to contribute. Employee participation in the savings program would be voluntary, using an auto-enrollment and an opt-out.

NEXT: Self-sustaining within two years

The program would need approximately $1 billion in assets to become financially self-sustaining, according to the financial analysis. At a 6% default contribution rate and auto-enrollment (with an opt-out provision), the program should reach that self-sustaining threshold at the end of year two, and repay any estimated upfront costs and ongoing annual expenses between the third and fifth years.

Other findings in the report are:

  • Individual retirement accounts (IRAs) are feasible and suitable legal structures for the program, particularly for account portability. The board recommends offering traditional and Roth IRAs.
  • The board recommends the legislature create an implementing board to oversee an independent entity responsible for managing the program, one that operates “with a maximum of transparency and reports to the legislature annually.”
  • The program should be made available to all employees, including part-time employees, at the Connecticut location of a business or nonprofit organization that offers enrollment in the program, provided the employee has worked at that entity for at least 120 days.
  • Individuals participating in the retirement program should be able to see their investments, performance, account activity and balances through a website.

The market and financial feasibility study of the program structure found it is financially feasible in most cases and meets all criteria identified for financial viability, including self-funding, attractive economics for third-party service providers, and reasonable fees for program participants (expected to be at or below 1%).

On the heels of the board’s market research and broad input from the public, academics and the business community, there is a practical way to help address Connecticut’s growing retirement gap in the state of Connecticut, says Kevin Lembo, state comptroller. “There is an entire generation of employees, many of them lifelong hard-working middle class people, who are headed to retirement financially unequipped, in part due to lack of access to a workplace-based retirement savings option,” Lembo says. “This is a problem, not only for those individuals and families who are financially forced to delay retirement indefinitely, but for our entire state and economy.”

The full report can be downloaded here.

Administration January 4, 2016

Pension Funded Status Unchanged in 2015

Towers Watson estimates the aggregate pension funded status of 413 Fortune 1000 companies reached 82% at the end of 2015—the same as it was at the end of 2014.
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The pension funded status of the nation’s largest corporate plan sponsors finished the year unchanged compared with the end of 2014, due in large part to a rise in interest rates mostly offset by a weak global stock market, according to a new analysis by Towers Watson.

Towers Watson examined pension plan data for the 413 Fortune 1000 companies that sponsor U.S. tax-qualified defined benefit pension plans and have a December fiscal-year-end date, and estimates the aggregate pension funded status to be 82% at the end of 2015, which is the same as it was at the end of 2014. The analysis also found that the pension deficit narrowed modestly by $28 billion to $291 billion at the end of 2015, compared to a $319 billion deficit at the end of 2014.

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According to the analysis, pension plan assets fell by an estimated 6% in 2015, from $1.41 trillion at the end of 2014 to an estimated $1.33 trillion at the end of last year. This reflects increases of roughly 2% due to investment returns and employer contributions offset by a decline of 8% from benefit payments and settlement transactions.

The analysis found that investment returns varied significantly by asset class. Domestic large-capitalization equities increased by 1%, while domestic small-/mid-capitalization equities declined by 3%. Aggregate bonds increased by less than 1%, and long credit bonds, typically used in liability-driven investing strategies, fell by 5%. With asset returns that were insufficient to keep up with the roughly 4% interest accruing on the obligations, the balance was made up by the decline in the obligation produced by the rising interest rates.

NEXT: Pension plan sponsor contributions and rising interest rates

Towers Watson estimates that companies contributed $32 billion to their pension plans in 2015. These contributions were sufficient to cover new benefits earned by employees in 2015 but did not include a meaningful level of additional contributions to reduce the overall funded status deficit. Employer contributions have been declining steadily for the last several years partly due to legislated funding relief, the company said.

Despite the lack of improvement in overall pension funded status, employers continued to de-risk their pension plans with lump sum buyouts and group annuity purchases. “In fact, 2015 turned out to be the second-most-active recent year for annuity purchases, and we expect employers will continue to evaluate their retirement plan strategies this year,” says Matt Herrmann, a senior retirement consultant at Towers Watson. 

“It’s been nearly a decade since employers as a group have been able to fully fund their pension plans. If the Fed’s decision to raise short-term interest rates last month is the first move in a pattern of rising rates, generally we could see improved pension funded status in the coming year, depending of course on how the stock market responds,” concludes Alan Glickstein, a senior retirement consultant at Towers Watson.

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