Investing June 5, 2015

PSNC 2015: DB Plan Investing

Liability-driven investing is still the game for many defined benefit plans, and equity investments can still play a role.
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Equity market risk and interest rate risk are the biggest risk factors for defined benefit (DB) plan investing today, according to Phil Kivarkis, U.S. director of Investment Policy Services at Aon Hewitt.

“DB plans are subject to mark-to-market accounting, so plan sponsors need to be liability aware,” he told attendees of the 2015 PLANSPONSOR National Conference. “Take the risks you will be rewarded for and get rid of the ones you won’t,” he suggested.

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Kivarkis said plan sponsors may hedge interest rate risk with long-term fixed income vehicles, aligning assets with liabilities. It may also make sense to use return seeking assets, but they should be well-diversified and not overly exposed to any one equity market.

Liability-driven investing (LDI) is still being used by many plan sponsors, and the LDI conversations are still about interest rates, said Phyllis E. Klein, senior director of the Consulting Research Group at CAPTRUST Financial Advisors. “They are still expecting rates to go up, talking about the bets they are making on interest rates, how rising rates will affect liabilities, and what they can do with assets to handle that effect.”

Rocke D. Blair, practice leader for the Cincinnati market at White Oak Advisors, added that DB plan sponsors that freeze their plans pursue LDI to try to control the volatility of funding and contributions, and control for interest rate risk, but active plans also do this.

NEXT: Using equity investments to boost funded status.

One way to boost funding is through equity investments, but Blair suggested plan sponsors use different types of equity that are not highly correlated to each other. He said plan sponsors, historically, think about using small- and large-cap and international equities, but most are highly correlated with respect to market movement, so emerging markets equities and alternative investments make sense.

Kivarkis noted that the Highway and Transportation Funding Act of 2014 (HATFA) effectively pushed out DB plan funding requirements three years, so that gives the market more time to do some of the heavy lifting for plans. But, plan sponsors need to manage their expectations. “I think returns will be moderate, and interest rates will move up, but slowly,” he said. “Funded status will move up, but DB sponsors will need to get out their checkbooks for the next few years.”

Smart beta is a new trend in DB plan investing, in which investors try to get better returns and a more balanced equity portfolio by focusing on factors other than market capitalization when choosing which companies in which to invest, Kivarkis noted. But, he said the next step should be an extension to alternative investments. “We think they make sense,” he said. “They enhance returns and have a low correlation to equities.”

Blair believes smart beta will replace hedge funds. But, he warned that it is just another tool in the DB investor’s toolbox and not a total solution to managing funded status.

Despite the withdrawal of DB plans from the employer-sponsored retirement plan landscape, it is still a market worth several trillions of dollars, Kivarkis noted. “If there’s a demand for a solution, someone will come up with it,” he said. “At some point there will be a move to efficient assets, and that will demand long-duration solutions.”

Benefits June 5, 2015

PSNC 2015: The Intersection of Health Care and Retirement

How do you split your dollars, and how do participants split theirs?
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American’s health care costs in retirement average $43,000 per year, according to Robert Massa, director of retirement at Ascende Wealth Advisers Inc.

Speaking at the PLANSPONSOR National Conference, he suggested for a healthy 65-year-old man, the cost of care adds up to roughly $369,000 over a lifetime; for women, that number is $417,000. While overall living expenses typically level out between age 45 and 54, then fall over the following decades, health care costs rise consistently until death, he added. 

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Early Boomers are most at risk of not being able to fund their health care needs, Massa said, but all participants could benefit from a retirement health savings plan.

For many years, the different aspects of a company’s benefits package were viewed as distinct, even disjointed, said Brian Coleman, director of benefits, compensation, payroll and HRIS at Dawn Foods. He urged employers to look at health and wealth together, to protect their employees and themselves.

Workers have to consider how their well-being, and their spouse’s, will affect their lifestyle and costs in retirement. Will they have to adjust their budget to cover an unexpected diagnosis? Have they planned for assisted living later in life? Do they have supplemental insurance in place for an accident or long-term condition? Health concerns should inform savings behavior, Coleman said, adding that Dawn Foods has seen a 5% reduction in loans since adding support products to the benefits package—especially telemedicine and discounts for hearing, vision and pharmacy expenses.

To instill this type of thinking into benefits decisionmaking, the conversation has to start in the boardroom, said John Carnevale, president and CEO of Sentinel Benefit and Financial Group. Plan ahead to prevent workers from “retiring on the job,” staying with the company not out of a desire to work but out of a desire to keep their paycheck and medical coverage. On the whole, the work force will be more dynamic and more engaged if older employees can afford to retire, making room for new talent to cycle in.

NEXT: “Our whole formula is backwards.”

“To me, there’s no difference between health wellness and financial wellness,” Massa said. The idea of complete wellness should drive both benefit plans. Getting unhealthy participants back on track—whether through a debt reduction or smoking cessation program, for example—will save the company money over the long term and make them better employees.

Carnevale suggested one possible path forward is to start spending less on health care and more on retirement. If participants were responsible for more of these costs, he argued, they would be more inclined to shop around for affordable solutions. They need to be more conscientious health care consumers, he said, adding that he has known workers who did not even know what health centers were in their area. Employers can provide information and guidance, and diverting funding to the savings plan would better prepare participants for retirement, as well.

Health savings accounts (HSAs) are also a wonderful opportunity, Carnevale said. Massa agreed, citing their triple tax benefit—contributions reduce taxable income, earnings on the account build up tax-free, and distributions for qualified expenses are not subject to taxation. Contributions will count toward the so-called “Cadillac” tax, he said, but that is about the only downside. Making consumers pay for their health care option makes them more informed about their health care spending. Providing more information about their options, including Medicare, is important for participants who do not understand the system, Coleman added. Workers need to know about the exchange, how portable their plan is and how to transition, at retirement, into new coverage.

Healthier people should also save more for retirement, Carnevale concluded, to prepare to pay for their longevity. Employers have been conditioned to pay for their benefits plans in a certain way, but that system does not serve participants efficiently. He challenged sponsors to ask themselves, how did your plan come to the decision about what you pay for health care? Is this still the best approach?

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