Administration May 8, 2017

Equity Rally Helped Pension Funding in April

While one source says pension funded status remained level and another says it dipped in April, both agree equity markets were a positive for pension plans during the month.
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The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level at 83% funded status in April, as a decrease in discount rates was offset by positive equity markets, according to Mercer.

As of April 30, the estimated aggregate deficit of $392 billion represents an increase of $1 billion as compared to the deficit measured at the end of March. The aggregate deficit is down $16 billion from the $408 billion measured at the end of 2016.

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“April was another month in which funded status failed to improve despite rising equity markets,” says Matt McDaniel, a partner in Mercer’s Wealth Business. “Falling interest rates have now given back most of the ground they gained following the election. Sponsors who were hoping that recent rate increases signaled a long term trend should re-evaluate their plans for dealing with a prolonged low-rate environment. Recent rate movements could also make lump sum exercises look more attractive in 2017.”

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios decreased 0.2% over the month of April, with modest losses driven mainly by a fall in the Treasury rate offsetting the gains in the global equity markets. LGIMA estimates plan discount rates fell 9 basis points, as Treasury rates fell by 8 basis points and credit spreads tightened by about 1 basis point. Overall, liabilities for the average plan were up 1.47%, while plan assets with a traditional “60/40” asset allocation increased by 1.27%.

However, LGIMA says the rally in equities has positively affected pension funding ratios over the month.
Data and Research May 8, 2017

Millennials Need More Investing Advice

Research suggests timing the market reduces returns every year, but Millennials are making these decisions at an alarming rate.

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Millennials are much more likely to make risky investment decisions compared to other generations, according to a study by MassMutual Life Insurance Co.

The firm finds these investors are inclined to make poor investment decisions by reacting to market volatility. They also seek financial advice at a smaller rate than other generations.

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“MassMutual’s research finds a real advice gap exists between younger workers and other generations,” says Tom Foster, national spokesperson for MassMutual retirement plans. “We discovered that those who rely the least on professional financial advice are most likely to react to shorter-term market trends by making potentially harmful decisions to reallocate their retirement savings investments.”

Morningstar reports that bad decisions by investors trying to time the equity markets reduce returns on average by 2.5% a year, MassMutual says. In addition, the longer investors remain in the market, the better their chances of making money, according to data from Standard & Poor’s.

The study also pinpointed major differences in how Americans receive financial advice, if at all. Overall, 32% of Americans polled said they relied on a financial adviser to guide them

However, older respondents were much more likely to use an adviser, with 62% of those ages 65 or older relying on professional money advice as compared to 8% of Millennials. Women (36%) are also more likely to rely on an adviser than men (29%), the study found.

“Getting professional advice helps reduce uncertainty about money matters, especially in volatile markets,” Foster says. “Our study showed an inverse relationship between reliance on professional money management and uncertainty about investing.”

The study found that one in 10 Americans admitted to being uncertain about how to invest their retirement savings. Millennials were twice as likely to be uncertain, while only 1% of those ages 65 or older said the same. The older the investor, the study found, the more certain he or she was about how to invest.

On a positive note, Millennials were almost twice as likely as compared to the general population to rely on their employer’s educational programs and resources to guide them when investing and allocating their retirement savings. They are also more likely to already be using investment strategies such as managed accounts that automatically allocate investments based on an investor’s age, risk tolerance or other factors.

“MassMutual has been seeing greater adoption of automatic allocation investment strategies such as target-date funds and managed accounts as more employers move towards automatically enrolling employees into 401(k)s and other defined contribution plans,” Foster says. “The proliferation of these investment strategies could be the saving grace for many people as target-date funds and managed accounts take away much of the guess work and uncertainty about investing for many people.”

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