Investing November 2, 2015

Q3 Market Drop Socks It to Institutional Investors

However, Corporate ERISA plans were the relative best performer among plan types last quarter.
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In the third quarter, institutional asset owners lost 4.6% at the median, according to Northern Trust Universe data.

Since 1998, the third quarter has averaged a -0.25% return. This year’s third-quarter return ranks in the bottom quartile all-time of third-quarter returns, as measured by Northern Trust Universe data.

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Corporate Employee Retirement Income Security Act (ERISA) plans were the relative best performer among plan types last quarter, losing 3.9% at the median, while Foundations & Endowments lost 4.7% and Public Funds lost 4.9%. Corporate ERISA plans returned to having the highest relative return after being the worst-returning plan type in the second quarter. All plan types had a median decline of at least two percentage points compared with the prior quarter.

“Having the smallest exposure to equities was a key factor behind the relative outperformance of corporate ERISA plans,” says Bill Frieske, senior investment performance consultant, Northern Trust Investment Risk & Analytical Services. “Another factor helping corporate ERISA plans was the longer duration of their fixed income programs. Corporate pension plans generally have been lengthening the duration of their fixed income programs while at the same time adding dollars to the allocation relative to Public Funds and Foundations & Endowments. The third quarter saw interest rates decline, pushing up returns for long duration bonds.”   

NEXT: The better performing investments

Private equity, real estate and fixed income programs all generated positive results in the third quarter, while U.S. equity and international equity were significantly negative, Northern Trust reports. Private equity was the best returning asset class in the third quarter with the median private equity program up 3%. Real estate was up about 2.3%, and the median bond program was up only 0.4%. International equity was down more than 10%, and the median U.S. equity program was down 7.6%.

Northern Trust’s findings generally showed Corporate ERISA plan returns were helped by a large allocation to U.S. fixed income (39% at the median), in addition to private equity (7.5% at the median). Public Fund returns were dampened by a large exposure to U.S. equity (31.2% at the median) and international equity (21% at the median). Foundation & Endowment plan returns were supported by a large allocation towards private equity (25%), but negatively impacted by exposure to domestic equity (19.2%) and international equity (11.2%).

Looking at asset allocation in the third quarter, corporate pension plans continued to move on a path of de-risking by moving from equity to fixed income investments. Public Funds continued to move money into private equity and international equity. The median allocation to private equity for Public Funds went from 1.6% last December to 5.8% currently. Foundations & Endowments reduced their allocation to fixed income from 16% to 11% while continuing to allocate to hedge funds and private equity.

The Northern Trust Universe tracks the performance of about 300 large U.S. institutional investment plans, with a combined asset value of approximately $899 billion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.

Benefits November 2, 2015

Plan Sponsors Admit They’re Unprepared for Post-ACA Reform

Employers confront compliance, offering more choices and restraining costs during open enrollment. 
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The Affordable Care Act (ACA) is sparking employers to consider new approaches to benefits funding and delivery, according to the Guardian Life Insurance Company of America. Among compliance and benefit design challenges, plan sponsors are rolling up their sleeves to meet ACA challenges that range from offering more choices to enhancing the enrollment experience, all the while finding ways to control costs and funding.

“Preparing for a post-health care reform era” is a vital benefits objective, say 61% of plan sponsors surveyed in the Guardian Workplace Benefits Study, but just four in 10 feel prepared to meet it. As employers face this myriad of reforms and regulations, 60% admit they need help managing the ACA terrain, with three trends—increased outsourcing, reliance on private exchanges, and consideration of self-insurance—gaining momentum.

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One in three employers expects to outsource more aspects of their benefits program as a direct result of the ACA. Nearly 70% of employers expect greater compliance and administrative burdens.

About 20% of employers expect to offer benefits on a private exchange in the next year. The top reasons: to increase employee choice and to improve the employee experience. Seven in 10 employers say it is highly important to offer benefits that meet their employees’ personal needs and help them make better benefits choices.

Of those thinking of self-insuring, 58% say the ACA is the main reason. Half of those planning to self-insure expect to carry stop-loss insurance, which pays employees’ medical bills after the plan sponsor has paid a predetermined amount. Some policies are designed to protect against high claims by any one employee or family member. Self-insuring medical plans is a less-common funding option for smaller firms but on the heels of ACA is receiving more attention. Seventy-eight percent of employers expect benefit cost increases because of the ACA, which would have an impact on the health benefit offering.

Employers need brokers and carriers to help them navigate the ACA and identify the best options for moving forward in a changed benefits landscape, according to Ray Marra, senior vice president of group products at Guardian. “As employers adapt to the ACA, we’re seeing greater adoption of private exchanges and self-funded medical plans paired with stop-loss insurance, so employers can deliver the workplace benefits their employees rely on while addressing the challenges they are facing.”

The Guardian Workplace Benefits Study aims to illustrate how the workplace can be a source of financial security for many American households, and how employees rely on benefits for overall feelings of financial preparedness.

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