Data and Research October 28, 2021

Many DB Plan Sponsors Adjusting LDI Strategies

Defined benefit plan sponsors have positive views of the direction interest rates will take and of equity markets, but they remain wary of how a continued pandemic will impact their plans.

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More than two-thirds of defined benefit (DB) plan sponsors surveyed by NEPC use liability-driven investing (LDI) strategies.

NEPC’s “Defined Benefit Trends Survey” of 76 DB plans, which have more than $115 billion in pension assets in aggregate and represent a diverse cross-section of plan types, including corporate and health care, found 71% completed a formal review of their LDI glide paths during the past 12 months. For 45% of those plan sponsors, this resulted in them redefining their glide paths and modifying future trigger points.

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But Brad Smith, a partner at NEPC and a member of the firm’s corporate defined benefit team, says the most interesting finding to him is that 14% of those who reviewed their LDI glide paths re-risked their portfolios. “This is the largest percentage that we’ve seen re-risking their portfolios,” he says. Smith notes that the most recent pension relief legislation passed by Congress increased the amortization period plan sponsors can use for underfunding, and, as a result, NEPC started seeing clients evaluate their LDI glide path and re-risk their portfolios.

The survey found 68% of DB plan sponsors use funded status as a glide path trigger, while 22% use interest rates. While 48% hit a trigger on their LDI glide path and took action to de-risk their plans, 13% hit a trigger but delayed or deferred the de-risking action. Half of those who delayed the de-risking event said it was because of their view of the interest rate environment.

“Fifty-six percent of survey respondents said they expect discount rates to be higher 12 months from now, so they expect their plan’s funded status to improve,” Smith explains. “This gives plan sponsors more confidence in letting equity assets continue to run. Interestingly, the majority said there’s a low probability of a market correction in next 12 months, and 56% indicated they are bullish on the stock market.”

Three in 10 survey respondents said the ongoing pandemic and the future of COVID-19 is the greatest threat to their investment programs in the near term. Despite the majority saying there is a low probability of a market correction, Smith explains that most plan sponsors are looking back to the first quarter of last year when the equity markets sold off.

“As investment committees are looking at all risk items, that is in the forefront of their concerns,” he says. “Seeing lockdowns in other countries over the past few months, an increase in cases due to the Delta variant and vaccine efficacy waning, there is a general concern that if the pandemic continues or gets worse, it will pose a risk to the equity market. In addition, if it gets worse, there could be a slowdown in economic growth, and the worsening could cause political tensions—other issues plan sponsors cited as potential threats to their investment programs.”

For 2022, NEPC will continue to watch the path of inflation. “What’s interesting is that inflation is good for pension funded status, but an offset to that is if interest rates go up too much, it will impact the value of equities,” Smith says. “There could be a ‘Goldilocks’ area of higher discount rates, but not so high as to adversely impact equities. In that case, we could see a nice improvement in funded status next year. We’re cautiously optimistic. We think equities still have room to grow, and we don’t believe there’s a strong case for rampant inflation.”

The full 2021 survey results will be unveiled during an NEPC webinar in January.

Benefits October 27, 2021

Employers Should Stress the ‘Savings’ in HSA Education

An Alegeus open enrollment study finds employees don’t understand how HSAs fit into a long-term retirement savings strategy and only 17% invest HSA funds for growth.

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This open enrollment season, employees are not connecting the link between health savings accounts (HSAs) and long-term savings, according to a survey from Alegeus.

While most consumers Alegeus polled in its “2021 Pre-Open Enrollment Survey” are actively saving for retirement (53%) and many consider themselves savvy investors (45%), a majority do not see HSAs as a means for achieving either. Only 32% say they understand that HSAs can help with long-term expenses, and only 17% invest HSA funds for growth.

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Alegeus says this presents areas where benefit administrators and employers can focus their education efforts. “I see a major opportunity here to put the ‘savings’ back in ‘health savings account,’” says Leif O’Leary, Alegeus CEO. “We’re happy to see that consumers understand the value of long-term savings and investing. That’s a critical first step. But now it’s up to us as health benefit experts to provide the education and resources to help consumers take advantage of their HSA in pursuit of their saving and investing goals.”

More than half (56%) of survey respondents report that they have contemplated health care costs specifically in their retirement planning. However, 83% of those surveyed who have an HSA don’t invest their funds for growth. Alegeus says this could be due not only to a lack of available funds (most HSAs set a minimum threshold of $1,000 to invest), but also to a lack of knowledge about how HSAs work. Only one-third of respondents say they are “very familiar” with HSAs.

In addition, the survey found, only 32% of respondents understand that HSAs are beneficial for both short- and long-term expenses. Only 42% say they know HSAs can be used for investing.

While plan sponsors can use the open enrollment period to educate employees about how HSAs work, Steve Neeleman, founder and vice chairman of HealthEquity in Draper, Utah, previously told PLANSPONSOR, “The best time to engage with employees and educate them about health savings accounts is after open enrollment.”

In addition, Lisa Margeson, head of retirement client experience and communications at Bank of America in Boston, said that because some HSA investment providers only allow employees to invest their funds once they reach a certain amount of savings, it’s important for employers to educate employees during the year so they will know when they can invest and how to do so. A report from Devenir says those who invest their HSAs have an average total balance six times larger than those who don’t.

Experts at the 2021 PLANSPONSOR HSA Conference in April discussed the confluence of financial wellness and retirement, and how employers can maximize HSAs to help employees achieve both financial and retirement security. First, they said, plan sponsors should merge the categories and discuss the two during the same season.

“Plan sponsors think of retirement at one point in the year and health care in the other part of the year,” said Greg Puig, vice president of benefits consulting services at Sentinel Benefits and Financial Group. “We need to bring the strategic initiative at an employer level, but also add benefits and education within that equation.” The solution is to add retirement planning as part of the benefit, and not as its own separate category, Puig noted.

During the 2020 PLANSPONSOR HSA Conference, William Applegate, vice president, industry relations, Fidelity Health Solutions, said the best way to get people to open an HSA is to integrate education about the accounts with retirement savings and to make investing the assets in the HSA automatic.

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