Data and Research February 16, 2022

Institutional Investors See Strong Returns in 2021

Public funds bested corporate funds thanks to higher equity allocations.

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Institutional investors posted positive returns in the fourth quarter of 2021, topping off a strong year.

The median return for institutional asset owners included in the Northern Trust “All Funds Over $100 Million” plan universe was 3.5% for the quarter and 14.4% for the one-year period. Institutional assets tracked by Wilshire Trust Universe Comparison Service, meanwhile, posted an all-plan median return of 3.96% for the fourth quarter and 13.33% for the year.

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“All plans benefited from the strong rally in asset prices across most segments of the global securities market in 2021,” says Jason Schwarz, president and chief operating officer of Wilshire. “U.S. equity exposure was a dominate driver of performance in 2021, as plans with the largest allocations to U.S. equities outperformed.”

U.S. equities, represented by the FT Wilshire 5000 Index, rose 9.58% in the fourth quarter and 26.70% for the year. Meanwhile, international equities, represented by the MSCI AC World ex U.S., rose 1.82% in the fourth quarter and 7.82% for the year. U.S. bonds, represented by the Wilshire Bond Index, rose 0.59% for the quarter and gained 0.14% for the year.

Across all plan types, quarterly median gains ranged from 2.80% to 4.57% for large corporate funds (assets above $1 billion) and public funds, respectively, according to Wilshire. One-year median returns ranged from 6.26% to 16.79% for large corporate funds (assets above $1 billion) and very large public funds (assets above $5 billion), respectively.

The Northern Trust Universe tracks the performance of 380 large U.S. institutional investment plans, with a combined asset value of more than $1.4 trillion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.

The Northern Trust Corporate Employee Retirement Income Security Act universe median return for the quarter was up 2.9%. The Northern Trust Foundation and Endowment universe produced a 3.2% median return for the quarter, while the Northern Trust Public Funds universe median return was up 3.8%.

The Northern Trust U.S. equity program universe produced an 8.1% median return for the quarter. The S&P 500 large-cap index was up 11.0% for the three-month period, Northern Trust says. The Russell 1000 large-cap index returned 9.8% compared to the Russell 2000 small-cap index, which returned 2.1% for the period. The large-cap growth segment had the strongest quarterly performance in the U.S. public equity market for the second consecutive quarter, where the Russell 1000 Growth index returned 11.6% during the quarter. 

The Northern Trust ERISA universe plan median one-, three- and five-years returns were 7.9%, 14.3% and 10.4%, respectively. The U.S. fixed-income asset class remains the largest ERISA plans allocation at a median allocation of 44.8%, which represents a 10% increase over the past 10 years. The range in the universe’s fixed-income asset class allocation between the top and bottom quartile is more than 40%.

The Northern Trust Public Funds universe median multi-period returns for the one-, three- and five-year periods came in at 14.3%, 14.7% and 11.1%, respectively. Public funds’ median fourth quarter allocations to U.S. and international equity are 33.0% and 14.8%, respectively. The median exposure to U.S. fixed-income for public funds is 20%.

The Northern Trust Foundations and Endowments universe plan’s median one-, three- and five-years returns were 16.6%, 15.9% and 11.8%, respectively. The Foundation and Endowment plan’s median U.S. equity allocation was 21.5% in the quarter. The median allocation to private equity is 20.8%, a 100% increase over the past five years, according to Northern Trust.

Compliance February 15, 2022

Default Lifetime Income Legislation Introduced in House

Legislators say the LIFE Act builds upon the SECURE Act provision that enhanced the safe harbor on which plan sponsors rely when choosing an annuity provider.

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U.S. Representatives Donald Norcross, D-New Jersey, and Tim Walberg, R-Michigan, both members of the House Committee on Education and Labor, have reintroduced the Lifetime Income For Employees Act, known as the LIFE Act for short.

The legislation would allow annuities to be a default investment in an employer-provided 401(k), with the stated goal of supporting workers as they seek to build a steady, guaranteed income stream during retirement. Specifically, the LIFE Act addresses certain requirements in the qualified default investment alternative regulatory safe harbor that prevent some employers from being able to benefit from the safe harbor if they include annuities as part of their retirement plan’s default investment.

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By making these changes, the LIFE Act builds upon the Setting Every Community Up for Retirement Enhancement Act provision that enhanced the safe harbor on which plan sponsors rely when choosing an annuity provider for their retirement plan. While the enactment of this improved safe harbor was a significant step, Norcross and Walberg say the LIFE Act will take the critical next step and ensure more savers have access to annuities.

“American workers are concerned about retirement and their concerns are not unfounded,” Norcross says. “Seven out of 10 Americans say they’re living paycheck to paycheck and 80% say they’ll need to work in retirement due to lack of savings.”

Norcross says the number of private-sector workers receiving lifetime benefits from a traditional defined benefit pension plan has declined dramatically since the 1980s. He cites his own experience as a retired electrician to note how important pensions are to workers who rely on them for their retirement.

“By creating ‘individual pensions,’ this legislation will provide hard-working Americans with a guaranteed income so they can retire with dignity,” he says.

Walberg echoes those sentiments and says he is pleased to work with Norcross on a bipartisan effort to help families achieve financial security after a lifetime of hard work.

Supporters of the LIFE Act include Thasunda Brown Duckett, CEO of TIAA. In an open letter published to recognize the reintroduction of the LIFE Act, she says annuities are vital to retirement security because they are the only products that can provide individuals with guaranteed returns and a guaranteed stream of income in retirement.

“Increasingly, retirement plan participants rely on their plan’s default product as their long-term investment strategy,” Brown Duckett says. “While many participants mistakenly believe the default option provides a guaranteed retirement income, most QDIA products do not. By amending the QDIA safe harbor, the LIFE Act will encourage more employers to adopt annuities as part of their default offering so that more Americans will be able to transition seamlessly from saving for retirement to benefiting from a guaranteed income stream when they retire.”

Ahead of potential debate and passage of the new legislation, plan sponsors and advisers are now preparing for defined contribution plan participants’ reactions to the lifetime income estimates that will be coming on their plan statements this year.

In the SECURE Act, Congress required that DC plans provide retirement plan participants with projections illustrating monthly retirement income amounts generated from their accumulated retirement savings. The Department of Labor’s interim final rule on the matter, published in September, requires that participants’ projected income be illustrated as an account balance conversion to a lifetime income annuity.

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