Investing March 13, 2014

DC Participants Favor Fixed Income in February

March 13, 2014 (PLANSPONSOR.com) – In a reversal of the past four months, participants of defined contribution (DC) retirement plans favored fixed income investments in February, according to Aon Hewitt’s 401(k) Index.
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Findings from the index show that 10 of the 19 trading days last month saw fixed income receive transfer inflows. Overall, net transfer activity for February moved slightly away from diversified equities (equity assets excluding company stock) of $21 million (0.01%). Total transfer activity across the index was low, valued at $264 million (0.17%). On the other hand, employee discretionary contributions to equities, another measure of participant sentiment, increased to 66.5% in February, up from 65.6% in January.

Overall, DC plan participants’ daily transfer volume for February averaged 0.023% of total daily balances, slightly lower than last month (0.025%). This is below the 12-month daily average of 0.027%. In February, two days had transfer activity above-normal levels. In this context, normal is defined as when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Aon Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

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On average, the index shows that participants’ overall equity allocation increased to 65.5% at the end of February, up from 64.7% in January.

February was also shown to be a strong month for the global equity markets, as they rebounded from their poor showing in January. With U.S. equities, as measured by the S&P 500 Index, the gain for February was 4.6%, and with non-U.S. equities, as measured by the MSCI All Country World ex-U.S. Index, the gain was 5.1% for the month. Emerging markets also increased during February as the MSCI Emerging Markets Index returned 3.3%. The fixed income market posted a positive return, with the Barclays Capital Aggregate Bond Index gaining 0.5%.

The index notes that fixed income asset classes experienced net inflows during February. Bond funds had the largest inflows with gains of $79 million (30%) and GIC/stable value funds followed with a gain of $51 million (20%). In addition, specialty/sector funds had $35 million (13%) of the monthly inflows, while international funds and self-directed window funds both received around $29 million (11%).

As for net outflow, activity was led by company stock funds with $191 million (73%), large U.S. equity funds with $37 million (14%), and small U.S. equity funds with $28 million (11%) transferring out.

Administration March 13, 2014

Pension Funding Sees Improvement in February

March 13, 2014 (PLANSPONSOR.com) – The funded status of pension plans showed an improvement in February, compared with figures from January, says a new analysis from Russell Investments.
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Following a decrease in funded status during the first month of 2014, representative open and frozen pension plans increased funding by 1.6% and 1.1% respectively, according to the February installment of “The Russell LDI Update.” The report is authored by Marty Jaugietis, managing director of LDI solutions for Russell Investments and Calvin Gong, an LDI portfolio manager for Russell Investments.

In terms of the 19 U.S. corporations with pension liabilities exceeding $20 billion, which Russell calls the “$20 billion club,” an overall improvement in funded status was seen from 76% to 87% in aggregate over 2013, say Jaugietis and Gong (see “Time Is Ripe for Pension Strategy Changes”).

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The authors note that while these corporations saw an improved pension position, responses to this improvement varied from company to company. For example, when it comes to asset allocation, only one of these 19 companies, Ford, shifted more than 3% of its assets to liability-hedging fixed income thus far in 2014. Ford has also stated an intention to shift to 80% fixed income over the next few years.

Another one of these 19 companies, HP, took a different route, say the authors. That company chose to “re-risk” its pension plan, moving from a mix of 40% return-seeking investments and 60% fixed income to a mix of 55% return-seeking investments and 45% fixed income.

The authors of the analysis also note that the 19 companies that make up this “club” also funded their plans differently from one another. Ford paid $5 billion into pension plans in 2013 and intends to contribute an additional $2 billion in 2014. By contrast, HP contributed nothing to its pension plans in 2013 and intends to contribute nothing this year as well. The authors conclude that HP is using returns from its pension assets to close their funding shortfall, while Ford has chosen a different route.

With regard to tracking of the Barclays-Russell LDI Index, the analysis shows that February saw an increase in typical pension liabilities between 1% and 2%, with the increase being the largest for plans with longer duration investments. This follows fairly significant liability increases in January, meaning that the liabilities of plans with longer durations may be as much as 6% higher than at the start of the year.

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