Portability Is Key in President’s Retirement Initiatives

“If we remove the friction, more plan participants will stay in the system,” says Spencer Williams, president and CEO of Retirement Clearinghouse.

President Obama didn’t give details of retirement initiatives in his State of the Union address, but he did advocate for the portability of benefits, saying portability was one intent of the Affordable Care Act (ACA) and that when people move from job to job, their retirement benefits should go with them.

However, this week, Department of Labor (DOL) Secretary Tom Perez introduced a number of retirement proposals that are going to be included in President Obama’s 2017 budget.

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One of the primary initiatives is that the administration will be looking to work with Congress on broadening multiple employer plans (MEPs). One of the unnecessary barriers Perez cited was that under current law, there has to be commonality between employers coming together to form a MEP. The administration would like to open up the program so that employers could more readily access an open MEP, such as those from different sectors but a similar location, for example, he said.

This was one complaint expressed by commenters to the DOL’s proposals for state-run retirement plans—that allowing states to form MEPs was unfair to the employer-sponsored retirement plan industry.

Following the announcement of the initiatives, Barbara Novick, vice chairman at BlackRock issued a statement saying, “We favor President Obama’s 2017 budget proposal to eliminate the current ‘nexus’ requirement for employers to participate in a MEP. Participating in a MEP allows a small employer to offer employees a 401(k) plan with lower administrative burdens and less expense. If unrelated employers can participate in an open MEP, they can pool resources and reduce costs, which creates a positive incentive to adopt plans.”

According to Novick, BlackRock also recommends relaxing existing Employee Retirement Income Security Act (ERISA) and Internal Revenue Service (IRS) reporting and disclosure rules and testing requirements, particularly for small employers. “We urge the DoL and Treasury to work together to improve accessibility to plan information and education and to make it more straightforward to establish and maintain a plan,” she stated.

NEXT: Portability will keep savings in the system

The president’s 2017 budget will include a $100 million grant proposal to encourage the development of portability ideas for benefits that will allow workers to take their retirement benefits and other employment-based benefits from job to job. According to a fact sheet about the initiatives, he goal is to develop and test models that are portable across employers and can accommodate intermittent contributions or contributions from multiple employers for an individual worker. In addition, the DOL will evaluate existing portable benefits models, and examine the feasibility of greater change.

Spencer Williams, president and CEO of Retirement Clearinghouse (RCH) in Charlotte, North Carolina, explains to PLANSPONSOR that portability was established in legislation which gave birth to the rollover IRA market. “By statute, you can take defined contribution (DC) plan accounts with you to a new employer, and in general, employees can take money out of the plan when they terminate,” he says.

However, according to Williams, huge chunks of the DC plan market were overlooked—the small account balances, which is what RCH works to save. “That’s two-thirds of all people who change jobs every year,” he says. While legislation enables them to roll over their small balances, the requirements for assuring qualification and the process it takes to implement the rollover make those with small balances likely to cash out because it’s easier, Williams contends. “Sixty percent of people with $5,000 or less in their DC plans are cashing out; some may need money, but for the biggest part, it’s because too much work is involved to move it. If we remove the friction, more plan participants will stay in the system.”

RCH believes automatic portability is the most efficient way to remove friction, and is seeking a confirmation from the DOL to use negative consent to move small plan balances from one employer to another. “This will get a sizeable part of those 60% cashouts to stay in the system,” he says. “We’ve spent countless hours educating trade groups, regulators and legislators, so it is gratifying to see them catch on.”

NEXT: Auto IRAs

The President’s 2017 budget will include a proposal—that he’s included in his past budgets—that would require employers with more than 10 employees that do not currently offer a retirement plan to automatically enroll their workers into an IRA. Other individuals not automatically enrolled could participate so long as they fall below the income cutoff, and could continue to make their own contributions even if they change jobs. Employers with 100 or less employees who offer an auto-IRA would receive a tax credit of up to $3,000.

Caring Across Generations, a group that advocates for policy changes around caregiving, applauded all initiatives announced, but noted that one in three workers currently do not have access to a retirement savings plan, and professional caregivers and family caregivers for seniors are at particular risk of lacking any kind of retirement security. “A growing majority of professional caregivers are part of the flex economy where the structure of work is too inconsistent to invest in retirement. Additionally, many family caregivers have to take time off or switch jobs to adapt to their families’ needs. Ensuring that the people who care for our older loved ones, one of the nation’s fastest growing workforces, can themselves retire and age with dignity is imperative,” it said in a statement.

Williams noted that almost all initiatives go through evolution, and anything that expands coverage at this point in the game is good. Speaking about auto IRAs he says, “I would assume that getting them in place is a first step and letting them evolve is classic America.”

However, Williams also thinks an auto IRA system has the potential to create more disconnected accounts, so portability initiatives in addition to the auto IRA initiative “are important to avoid a mess.”

PIMCO Suggests Six Investment Themes for DC Plan Sponsors

Richard Fulford at PIMCO suggests plan sponsors evaluate active approaches, including custom target-date strategies, among other investment considerations.

As U.S. interest rates begin to normalize and inflation picks up, defined contribution (DC) plan sponsors have an opportunity to refine their plan investment menus to improve retirement outcomes, according to PIMCO.

In a Viewpoint article, Richard Fulford, executive vice president and head of U.S. Retirement at PIMCO, suggests plan sponsors evaluate active approaches, including custom target-date strategies, core strategies augmented by income, real assets, hedged international equities and alternative capital preservation options.

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“Of the six ideas proposed, only the first, going custom, requires a meaningful revamp of the plan, or more accurately, the target date option,” Fulford tells PLANSPONSOR. “The remaining asset class-specific enhancements can be easily implemented by adding a new strategy or by replacing an existing strategy, whether in the core lineup or within a custom target-date or white label structure. We believe that these practical enhancements have the potential to result in a meaningful improvement to risk-adjusted investment returns for plan participants over time.”

In the article, Fulford says unique plan demographics are often a key motivation for using custom target-date funds. Other compelling reasons include increased control and the potential for improved participant outcomes. A custom approach allows for the implementation of a best-in-class structure, which may include a broader array of diversifying asset classes, category-leading asset managers and potentially lower fees through the thoughtful allocation of active management dollars.

Going custom is more accessible than ever, Fulford says, because recordkeeping, custody and trust capabilities have advanced significantly, and there are more experienced consultants able to walk clients through the process.

In this market environment, active strategies may help mitigate risks and uncover value in global fixed-income markets, Fulford also suggests. He cites Morningstar’s Intermediate-Term Bond Manager data, which shows that for annualized returns over the 10 years ending December 31, median and 25th percentile active managers outperformed not only their indexes, but importantly the median passive manager, by 29 basis points (bps) and 75 bps (net of fees), respectively. “Active managers have delivered meaningful value to participants historically, and may be better equipped to manage risks prospectively, particularly should interest rates rise,” he writes.

NEXT: Augmenting core bond strategies and adding inflation hedging

According to Fulford, the Fed's interest rate hiking cycle is likely to be the most gradual on record and have a lower destination point than in prior cycles. The result: Rising rates could be advantageous as higher yields dominate returns over time. 

“While the potential benefits of core bonds–income, capital preservation and equity diversification–are as valid as ever, there is a strong argument for augmenting core holdings to address benchmark flaws, broaden the investment opportunity set and potentially mitigate the impact of rising rates,” he says. Fulford notes multi-sector, income-focused strategies give managers the flexibility to invest globally and seek to maximize the production of consistent income derived from credit, mortgage, emerging markets and other higher-yielding sectors.

In addition, Fulford contends there have been significant declines in inflation expectations and a lack of urgency by DC sponsors to add real asset exposures to plans. “With inflation poised to pick up this year, now could be an opportune time to act,” he writes. “Real assets provide a unique source of real returns that hold potential to build and preserve participant purchasing power. They also may provide portfolio diversification benefits during inflationary periods, when stocks and bonds may suffer.”

Fulford suggests that if plan sponsors offer participants only one real asset option, they may consider a multi-asset approach that combines real asset categories including Treasury inflation-protected securities (TIPS), commodities and real estate investment trusts (REITs), among others.

NEXT: Hedge international equities and review capital-preservation investment options

Fulford says equities remain a cornerstone of DC portfolios and, in PIMCO’s view, are essential for delivering returns participants need to achieve their retirement objectives. But, for those invested in international equities on an unhedged currency basis, the recent depreciation of many currencies versus the U.S. dollar has detracted significantly from portfolio returns while subjecting plan participants to significant volatility.

PIMCO sees the potential for further U.S. dollar appreciation, albeit at a slower pace than the past 18 months. Fulford notes that few DC plans hedge currency exposure within their international equity allocations, but suggests they review their international equity holdings and consider the value of diversifying existing unhedged exposures by adding a hedged option, either as a standalone option or within a white label structure.

SEC reforms of money market fund (MMF) rules take effect this October. Fulford points out that this means plan fiduciaries have less than one year to prepare for sweeping changes which, when combined with evolving technical and macroeconomic factors, may make MMFs an unattractive capital preservation option for plan participants.

According to the Viewpoint article, most MMF complexes have been reacting to these reforms by broadly switching their DC offerings to government MMFs (G-MMFs), which can maintain a $1 net asset value and not be subject to fees or redemption gates. But Fulford says this will likely increase demand for government paper amid limited supply, keeping G-MMFs’ nominal yields low and real yields negative.

There are several attractive capital-preservation-focused alternatives that PIMCO recommends for evaluation, including stable value, short-duration fixed income and white label (or custom) bond vehicles that combine these and other strategies.

“We recommend that plan sponsors consider these investment ‘ideas’ in the context of their overall plan objectives and constrains and under the advice of their investment consultant or adviser,” Fulford tells PLANSPONSOR.

The Viewpoint article can be viewed here.

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