Benefits June 4, 2014

Participants Want Plans with Stable Value Option

June 4, 2014 (PLANSPONSOR.com) – Demand for stable value investment options remains high among retirement plan participants, says a new report from Transamerica Retirement Solutions.
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The provider of customized retirement plan solutions released “Participant Attitudes Toward Stable Value Offerings,” which finds that the majority of respondents surveyed for the report describe stable value products as a necessity for a retirement savings plan. Other findings support the conclusion that participants place a high value on stable value investments.

“Our results show that over 90% of participants who have access to stable value products invest in them,” says Marijn Smit, president of Transamerica Stable Value Solutions Inc., based in Harrison, New York. “That is a confirmation to plan sponsors about the importance of providing access to this type of investment. Based on our results, they’re an important part of a well-diversified investment mix, and having access to these products appears to encourage participants to save for retirement and helps them invest with a greater sense of security.”

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Other findings in the report include:

  • Participants are more confident when investing in stable value. Respondents agreed that stable value investments could help them achieve a successful retirement outcome and reduce the impact of stock or bond market downturns.
  • Stable value sets better plans apart from others. Participants have a higher opinion of plans that offer stable value investments.
  • There is significant interest from participants who do not have access. More than 50% of respondents who do not have access to stable value investments as part of their retirement plan expressed interest in investing in this option.

Retirement industry experts believe that stable value investments still have a strategic role as a core menu option for 401(k) plans (see “Keep It Steady”). Experts also caution plan sponsors to be aware of the interest rate environment, which can affect stable value investments (see “The Risk of Rising Interest Rates on Stable Value Funds”).

The report notes that stable value generally refers to a relatively low-risk asset class that focuses on capital preservation and liquidity, while seeking to provide steady, positive returns to participants within certain types of savings plans. Stable value is available only in tax-qualified retirement savings plans, such as defined contribution plans, as well as in some tuition assistance plans. It is not available in either mutual funds or individual retirement accounts.

The findings of the report are based on an online survey of 350 defined contribution plan participants conducted in December 2013. Respondents include 132 participants ages 20 to 35, 65 participants ages 40 to 49, 95 participants ages 50 to 64, and 56 participants ages 65 or older. Among respondents, 184 have access to a stable value option in their retirement savings plan, 69 do not have access, and 97 are not sure.

A copy of the full report can be requested by emailing marketinsights@transamerica.com.

Administration June 4, 2014

Funding of S&P 1500 Plans Unchanged in May

June 4, 2014 (PLANSPONSOR.com) – An analysis by consulting firm Mercer finds that funding for defined benefit (DB) pension plans sponsored by S&P 1500 companies remained relatively unchanged in May at 84%.
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“Funded status took a bit of a breather in May following the big declines we saw through April,” says Jonathan Barry, a partner in Mercer’s Retirement business, based in New York. “A fairly modest decline in interest rates was enough to mostly wipe out a pretty positive month of equity returns, highlighting the volatility to which many U.S. plan sponsors are exposed. However, plan sponsors who have implemented risk management strategies have likely cushioned the blow significantly.”

The Mercer analysis finds that during May, small gains in equity markets were largely offset by growth in plan liabilities due to further declines in interest rates used to calculate corporate pension plan liabilities. The collective estimated deficit of $343 billion, as of May 31, is down $17 billion from the estimated deficit of $360 billion, as of April 30, and up $107 billion from the beginning of 2014.

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Mercer also notes that U.S. equity markets earned about 2.3% during May based on the S&P 500 Index. Typical discount rates for DB plans, as measured by the Mercer Yield Curve, decreased by 11 basis points to 4.06%, its lowest point in a year, driving liabilities upward.

Barry says, “Long duration fixed income portfolios have continued to perform well, moving in parallel with plan liabilities, and plan sponsors who have implemented risk transfer strategies, such as terminated vested cashouts, have effectively taken equity and interest risk off the table for a portion of their plan liabilities, and have been less affected by the decline in rates.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to May 31 in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all nondomestic plans.

The estimated aggregate value of DB plan assets of the S&P 1500 companies as of December 31, 2013, was $1.80 trillion, compared with estimated aggregate liabilities of $2.03 trillion. Allowing for changes in financial markets through May 31, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of May the estimated aggregate assets were $1.87 trillion, compared with the estimated aggregate liabilities of $2.21 trillion.

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