Administration October 26, 2017

Multiemployer DB Plans Show Signs of Recovery

Investment returns are the biggest factor in multiemployer plans’ funded status improvement, according to Milliman data.

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Multiemployer defined benefit (DB) plan funding as of June 30, 2017, is nearing its best position since the market collapse of 2008, according to Milliman’s Fall 2017 Multiemployer Pension Funding Study.

The aggregate funded percentage for multiemployer plans is estimated to have improved to 81% as of June 30, compared with 77% as of December 31, 2016, reducing the system’s shortfall by $21 billion. The estimated investment return for our simplified portfolio for the first six months of 2017 was about 7.6%, outpacing plans’ investment return assumptions. Assumed returns are generally between 6% and 8%, with a weighted average interest rate assumption for all plans equal to 7.43%

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The gap between the funded percentages of critical versus noncritical plans continues to widen. The aggregate funded percentage of critical plans remains around 60% as of June 30, while the funded percentage of noncritical plans is approaching 90% after a strong uptick in the first six months of 2017. The substantially lower asset base of critical plans (in relation to their liabilities) requires much stronger asset returns for these plans to see improvement in their funded percentages.

That fact, coupled with severe negative cash flow positions, has proven too difficult for critical plans to realize significant recovery in their funded percentages from their low points after the 2008 crash, according to Milliman.

While multiemployer pension plans continue to show signs of recovery, the universe continues to face significant pressures, with many of the most troubled plans on track to rely on assistance from the Pension Benefit Guaranty Corporation (PBGC), which is currently facing its own dire financial issues. Healthier plans face the risk of increased PBGC premiums, and Milliman says trustees for these plans need to be vigilant in monitoring financial trends and looking for ways to reduce risk exposure as their plans continue to mature.

The full Fall 2017 Multiemployer Pension Funding Study report may be downloaded from here.
Investing October 26, 2017

Fidelity Shares Lessons for Enduring Market Volatility

Baby Boomers’ average 401(k) account balance in June 2007 was $115,000, but those who continued to contribute to their account saw that balance grow to $315,000 as of this past June.

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In the decade since the Great Recession of 2007, Fidelity Investments has found mixed reactions from investors who have been with the markets since that time.

Those who did not flee to cash but remained invested have portfolios that are 50% higher than those who sought safety, Fidelity found. However, 25% of people have reassessed how much risk they can handle and have moved to more conservative portfolios, where they have remained in the past 10 years.

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Today, only 38% of people feel more confident in their investment approach than they did in 2007, down from 48% in 2012.

“Although there are many reasons why people chose to exist the market, looking back a decade later, investors who managed to stay the course have enjoyed better results,” says Ken Hevert, senior vice president of retirement at Fidelity. “What we’ve seen in the ensuring years is proof that the most prudent investors are those who resist being reactive and instead keep their financial objectives firmly in mind by looking past market volatility. No one knows when the next market downturn will take place, but those who learned from the last great financial crisis are more likely to be better positioned to weather future financial storms.”

Fidelity notes that from late 2007 to early 2009, the S&P 500 lost 40% of its value; however, between June 2007 to today, the S&P is up 97%.

Four Lessons From the Great Recession

Fidelity says the first lesson investors should take to heart is to keep their eyes on the long term. Baby Boomers’ average 401(k) account balance in June 2007 was $115,000. Boomers who continued to contribute to their account saw that balance grow to $315,000 this past June—a near tripling of wealth in 10 years.

The second lesson investors should consider, Fidelity says, is to save more and reduce debt. The company’s survey of 1,205 investors asked them what actions steps they have taken since the Great Recession. Thirty-six percent said it has been to reduce debt, and 26% said it has been to save more. Fidelity says its recordkeeping data shows that retirement plan participants saved an average of 7.7% of their salaries as of the second quarter of 2007. A full decade later, that is now 9.5%.

The third lesson, according to Fidelity, is to have a diversified portfolio of stocks, bonds and cash. The fourth and final lesson Fidelity offers to investors is to work with a financial adviser. Fidelity found from its survey that those investors who have an adviser are saving more (31% versus 23%) and are more confident about their approach to investing than those who do not have an adviser (50% versus 31%).

Hevert notes that by working with an adviser, investors are more likely to remain committed to the markets.

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