Products April 6, 2017

Emotion Plays a Role in Measuring Financial Wellness

Fidelity Investment’s new assessment will take into account how people are managing their money as well as how they feel about finances.
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All over the country, financial troubles are keeping working Americans up at night, and it is even damaging their mental health. According to a recent study by Fidelity Investments, 51% of people say they are just breaking even or spending more than they earn per month.

To reverse this trend, the firm is releasing its Fidelity Financial Wellness Score. This assessment helps people measure their financial health, while identifying their most pressing financial flaws and how to address them. Fidelity says this tool goes beyond gauging the key aspects of money management, but it also takes people’s emotions into account.
 
“The score is based on what we believe are the four key domains of Financial Wellness: budget, debt, savings and protection, all of which are equally significant,” says Jeanne Thompson, senior vice president of thought leadership at Fidelity Investments. “The score is unique in that it accounts for objective criteria, such as how much savings a person has and how they manage expenses, and subjective criteria, like how they feel about their finances. We believe Financial Wellness means being well and feeling well.”

The financial wellness score ranges from zero, representing extreme financial stress; and 100, representing excellent financial health.

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Although the tool will be available to employers in the summer, Fidelity has conducted a survey of more than 6,000 people to determine how well they are doing in each of these four money management categories as well as how they feel about each.

The results indicate that 14% are financially “excellent” (a score between 81 and 100), 37% are “good” (a score between 61 and 80), 33% are “fair” (a score between 41 and 60) and 16% “need attention” (a score between 0 and 40).

The survey also found that Generation Xers seem to be the most financially stressed with 52% saying they feel neutral or negative about their debt; meanwhile, 65% of Boomers feel like their debt is manageable.

Not surprisingly, the survey found that money tends to bring happiness. Fifty-seven percent of those surveyed said they could not be happy unless they are financially secure. Millennials are more likely to feel this way than other generations, with 66% agreeing with the statement. The study also indicated that planning for the long-term has its rewards. Those planning for more than 10 years ahead tend to be in excellent financial health, while those planning for the next few weeks are in need of the most attention.

Moreover, the survey found that women are twice as likely as men to feel worried or sick about their financial situation.

“When the Financial Wellness Score is made available this summer as part of Fidelity’s Money Checkup, it will be a wake-up call for some employees and for others it will bring peace of mind,” says Thompson. “The score will bring clarity to where they stand financially and put a spotlight on next steps. We’ll be working with employers on how they can incorporate this Financial Wellness measure as part of their strategy to give employees the financial confidence and control they need.” 

Investing April 6, 2017

U.S. Pensions Adopting Best Practices of Canadian Counterparts

Canadian pensions do a good job of keeping costs down, diversifying and using alternative investments.
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Given the rising Pension Benefit Guaranty Corporation (PBGC) premiums and persistently low interest rates, many U.S. pension plans have been adapting some of the practices of what Cerulli Associates call The Canadian Model.

The Model is centered around three attributes, according to Cerulli: cost mitigation, a well-diversified investment portfolio across several asset classes and geographies, and a large appetite for illiquid investments.

While the Canadian pension market is considerably smaller than the U.S. pension market—$1.2 trillion in assets compared to $6 trillion—the top 10 Canadian pension plans account for 45% of the market, compared to the top 10 U.S. pension plans accounting for just 22%. As a result, Cerulli says, Canadian pension plans are very sophisticated.

While U.S. pension plans typically turn to outside investment managers, Canadian pension plans handle a great deal of their investing in-house, thus lowering costs even though they pay their investment managers more than U.S. pension plans do, according to Cerulli.

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Canadian pension plans are also very well diversified, Cerulli found. For instance, the Ontario Teachers’ Pension Plan has 46% of its assets invested in equities, but only 2% in Canadian equities, as well as 23% in bonds. The fund is also invested in a variety of alternative investments and borrows in the money markets to help fund other investments.

Cerulli says that given the long-term horizon of pension plans, they can afford to invest in illiquid alternatives, which also provide returns not correlated to other investment classes. In addition, some alternatives, such as infrastructure, can provide steady cash flows, which are very beneficial to pensions as they provide retirees with income.

In addition, Cerulli says, “Many plan sponsors are keeping a close eye on President Donald Trump’s much-anticipated infrastructure plan. While many of the details surrounding the plan are unknown, some suggest new opportunities for infrastructure will arise.”

Cerulli’s complete report, “The Canadian Model for Defined Benefit Pension Plan Management,” can be purchased here.

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