Compliance February 2, 2017

‘Off Budget’ PBGC Premiums Viewed As Essential By DB Industry

When PBGC launched, the flat rate was $1 per participant; now it stands at $64 per participant, indexed to increase with inflation.
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Reintroducing a piece of legislation that would take Pension Benefit Guaranty Corporation (PBGC) premiums “off budget,” meaning they would not be counted as an income stream going towards the federal government’s general revenue, Senator Mike Enzi (R-Wyoming) says the move is necessary to protect the stability of the federally mandated insurance system for defined benefit (DB) plan sponsors.

That’s the goal of the Pension and Budget Integrity Act of 2017, also referred to as Senate Bill 270. Senator Enzi says such a change is necessary because the current approach leaves a problematic incentive in place for lawmakers to look at increasing PBGC premiums—a fairly obscure part of the revenue code, it must be said—to effectively “pay for” cuts in other areas of the tax code that get more attention from the general public.

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Simply put, the act would “ensure that PBGC premiums are no longer counted in general fund revenue, eliminating the incentive for legislators to raise premium costs to pay for unrelated initiatives and programs,” Enzi explains. “That change would help to stabilize single-employer pension plans and provides more certainty for America’s companies and their employees.”

As Enzi explains, the PBGC was established in 1974 to ensure adequate funds would be available for pension plans in the event an employer sponsoring a plan enters bankruptcy. In 1980, Section 406 of The Multiemployer Pension Plan Amendments Act allowed PBGC premiums to be calculated as general fund revenue for budget scoring, even though the premiums themselves are not used to pay for unrelated programs. For context, it should be observed that the flat-rate per participant PBGC coverage premium for 2017 stands at $64, up from $31 in 2006. When PBGC launched, the flat rate was $1 per participant.

“While the premiums are not used to pay for other programs the increases are counted for budget purposes as a revenue raiser, leaving sponsors of single-employer defined benefit plans to shoulder additional financial burdens,” Enzi observes.

As of the date of this article, the bill had been read twice and referred to the Committee on the Budget. Last week, Representative Jim Renacci (R-Ohio) introduced a 2017 house version, H.R. 761., which is also awaiting a full review. 

NEXT: Quick and positive industry response 

Similar to when previous versions of this bill have been introduced, retirement plan providers still seem very amiable to the idea; in fact a group of eight providers and industry associations reached out to PLANSPONSOR after Enzi reintroduced his bill, strongly praising the move. These included the ERISA Industry Committee (ERIC), the American Benefits Council, ASPPA College of Pension Actuaries (ACOPA), the Committee on Investment of Employee Benefit Assets Inc. (CIEBA), the National Association of Manufacturers, the Society for Human Resource Management, the U.S. Chamber of Commerce, and WorldatWork.

“It is critical for employers to have predictability with PBGC premiums,” suggests Annette Guarisco Fildes, president and CEO, The ERISA Industry Committee. “Right now there is nothing predictable about premiums, because Congress can raise them at any time to pay for other programs. This legislation is greatly needed to ensure that PBGC premiums are used solely to protect the pension system and not as a budget gimmick to pay for unrelated federal programs.”

Lynn Dudley, senior vice president, global retirement and compensation policy, at the American Benefits Council, agrees wholeheartedly. “Irresponsible PBGC premium hikes undermine retirement security by increasing the costs of plan sponsorship and pushing healthy employers out of the system,” she says. “This bill would eliminate the perverse incentive to raise premiums and help restore honesty and accountability to the budget process.”

Judy Miller, executive director of ACOPA, suggests that In past years, “PBGC premium increases for single-employer plans have been used as a budget gimmick. The thousands of responsible employers who sponsor defined benefit plans have been penalized simply because they choose to provide this benefit to employees. This legislation will put a stop to this unfair, and frankly deceptive, practice.”

Joining the chorus of support, National Association of Manufacturers Director of Tax Policy Christina Crooks concludes that “every additional dollar that manufacturers must pay to the PBGC is one less dollar that can be used to fund employee benefits, business investments and jobs … Manufacturers support the Pension and Budget Integrity Act to end the cycle of unnecessary PBGC premium increases that are effectively a tax on the employers that provide defined benefit pension plans.”

Full text of the proposed legislation is available here. 

Products February 2, 2017

Investment Products and Services Launches

Pantheon targets DC plans for private equity strategies; John Hancock overhauls TDF suite; Vanguard lowers expense ratios on 21 fund shares; and more.
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Charles Schwab Lowers Trade Commissions and Index Fund Fees

Charles Schwab announced that beginning February 3, 2017, it will reduce its standard online equity and exchange-traded fund (ETF) trade commissions from $8.95 to $6.95. Effective March 1, 2017, Charles Schwab will lower expenses for Schwab market cap-weighted index mutual funds to align with their Schwab ETF equivalents. Moreover, all investment minimums will be eliminated for these mutual funds, which will utilize a single share class.

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On March 1, Schwab will also minimize expenses on the Schwab U.S. TIPS ETF and Schwab Fundamental Index ETFs. Pending shareholder approval, the Schwab Fundamental Index mutual funds will follow suit effective May 1, 2017, by eliminating all investment minimums, employing a single share class, and aligning expenses with those in the comparable Schwab ETFs.

“Reducing online trade commissions as scale and technology lower our operating costs is a way to ensure our clients benefit from their commitment to us,” says Schwab President and CEO Walt Bettinger. “I am especially proud of our decision to eliminate investment minimums and employ a single share class in our market cap-weighted and Fundamental Index mutual funds—ensuring that every investor pays the lowest possible fees.”

Furthermore, Schwab is initiating a satisfaction guarantee policy. Simply put, clients dissatisfied with certain commissions, transaction fees or advisory program fees paid do the firm would be refunded for those expenses.

“Today’s consumers expect great value, a great experience, and a refund if they aren’t satisfied,” explains Bettinger. “We believe a modern investing experience should deliver on these expectations—period

Visit Schwab.com for more information, disclosures, and specific details.

NEXT: Symons Capital Releases Small Cap Equity Mutual Fund
Symons Capital Releases Small Cap Equity Mutual Fund  

The Symons Concentrated Small Cap Value Institutional Fund (SCSVX) is an extension of the Symons Concentrated Small Cap Value composite. SCSVX will purchase stocks with market capitalizations of less than $3 billion and will hold fewer than 20 stocks across a broad sector allocation.

“As part of designing this strategy, and in an ever-changing environment where fees are being compressed, we wanted to create a fund whereby we believe there will be great demand in the small value asset class” says Michael P. Czajka, CEO of Symons Capital Management. “In particular, with the lack of available capacity in the small cap value space coupled with a good process and a clear differentiation from our peers, I truly believe this will be the strategy that makes Symons Capital Management a nationally known firm, side-by-side with some of the other great small cap value investment firms.”

Symons Capital Management’s portfolio manager and investment research team aims for long-term absolute returns and relative returns above benchmarks, with a focus on risk-management and downside protection over a full-market cycle.

“The small cap sector is an area where we believe our independent macro, quantitative and qualitative equity research can be used to good advantage to achieve long-term wealth accumulation,” says Czajka. “Typically, there is less published research available on such companies, which makes this a perfect strategy for us. I believe this strategy will be very successful not only with investment management consultants, but even more so with registered investment advisers who create asset allocation models utilizing mutual funds rather than ETF’s or index funds in this asset class.”

NEXT: Pantheon Targets DC Plans for Private Equity Strategies

Pantheon Targets DC Plans for Private Equity Strategies
 
Pantheon is introducing performance-based pricing to its private equity strategies targeting the defined contribution (DC) market.

The performance pricing option applies to the part of the portfolio invested in private equity and it’s accrued only when the performance of the private assets in the portfolio beats its benchmark, which is the S&P 500. Generally speaking, the firm says investors don’t pay for performance they did not experience.

“The innovative fee solution we are announcing today visibly aligns investors’ interests with Pantheon’s, addresses core plan sponsor concerns including costs and potential litigation, and it demonstrates the confidence we have in our ability to deliver strong returns to our investors,” says Kevin Albert, managing director at Pantheon.

For more information, visit Pantheon.com.

NEXT: John Hancock Overhauls TDF Suite

John Hancock Overhauls TDF Suite
 
John Hancock Investments has revamped its target-date funds (TDF) for the defined contribution (DC) market with new names and lower fees.

The John Hancock Multimanager Lifetime Portfolios, formerly known as John Hancock Retirement Living Portfolios, are designed to help manage longevity risk by following a glide path that begins with 95% equity exposure before gradually decreasing to 50% at the target retirement date. It then continues scaling down through the first 20 years of retirement until stabilizing at 25%. The portfolio management team implements the asset allocation strategy with a combination of active open-end mutual funds and other investments, tapping nearly 20 specialized teams.

The John Hancock Multi-Index Lifetime Portfolios, formerly known as John Hancock Retirement Living II Portfolios, are also designed to help manage longevity risk and follow the same lifetime glide path. Managers implement the asset allocation strategy with a combination of index-tracking exchange-traded funds (ETFs) and other investments to minimize the impact of expenses on portfolio returns. 

John Hancock Multi-Index Preservation Portfolios are designed for investors who want to minimize risk in the years leading up to retirement. Glide paths begin at 82% equity exposure which decreases to and stabilizes at eight percent upon reaching the target retirement date. John Hancock Asset Management implements the asset allocation strategy with a combination of index-tracking ETFs and other investments to minimize the impact of expenses on portfolio returns.

For more information, visit jhinvestments.com/targetdate.

NEXT: Vanguard Lowers Expense Ratios on 21 Fund Shares

Vanguard Lowers Expense Ratios on 21 Fund Shares

The financial services firm Vanguard says its clients saved almost $25 million after it lowered expense ratios for 21 individual mutual fund shares including three quantitative equity funds and six target-date funds (TDF)s.  

Last month, the firm reported lower expense ratios for shares of 35 funds representing aggregate savings of $13 million.

The expense ratio of the $6.6 billion Vanguard Strategic Equity Fund dropped three basis points to 0.18%, that of the $1.5 billion Vanguard Strategic Small-Cap Equity Fund dropped five basis points to 0.29%, and that of the $1.5 billion Vanguard U.S. Value Fund dropped three basis points to 0.23%. These funds are managed by Vanguard’s Quantitative Equity Group (QEG).

The firm’s six Target Retirement Funds (TRFs) saw their expenses drop by 1 basis point each. The expense ratios fell to 0.13% for both the Target Retirement Income Fund and the Target Retirement 2010 Fund, and to 0.14% for the Target Retirement 2025 Fund. Three institutional target-date funds—the $2.2 billion Vanguard Institutional Target Retirement Income Fund, the $2 billion Vanguard Institutional Target Retirement 2010 Fund, and the $6.3 billion Vanguard Institutional Target Retirement 2015 Fund—reported lower expense ratios of 0.09%.

For more information, visit Vanguard.com.

NEXT: Long Dollar Gold Trust Begins Trading

Long Dollar Gold Trust Begins Trading

The World Gold Council and State Street Global Markets, an affiliate of State Street Global Advisors, announced that the SPDR Long Dollar Gold Trust has begun trading on the New York Stock Exchange. GLDW seeks to track the performance of the Solactive GLD Long USD Gold Index, less fund expenses.

“The price of gold and the U.S. dollar have historically tended to move in opposite directions,” says Nick Good, co-head of the Global SPDR business at State Street Global Advisors. “By lessening the dollar’s potential impact on gold, GLDW seeks to provide investors the opportunity to realize the potential benefits of using gold as a strategic portfolio diversifier, while offering the ability to buffer against the potential adverse effects of a strong dollar on gold.”

The index combines a long position in physical gold and long dollar exposure against a basket of non-U.S. currencies. The organization notes that performance of the U.S. dollar against this currency basket is expected to increase or decrease the amount of gold held by GLDW. GLDW holds physical gold in the form of 400 ounce London Good Delivery bars stored in the custodian’s London vault, except when GLDW’s physical gold has been allocated in the vault of a subcustodian solely for temporary custody and safekeeping.

“GLDW is the first ETF listed in the U.S. backed by physical gold that is designed to hedge the movement of gold against the U.S. dollar,” says Joseph Cavatoni, principal executive officer of GLDW’s sponsor, and managing director USA and ETFs, World Gold Council.

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