Data and Research June 8, 2016

Retirement Not Americans' Only Financial Concern

“They fear the unknown. They don’t know how to plan for the unplanned, and they worry that if something unexpected happens, it could have deep and lasting consequences," says Rebekah Barsch, with Northwestern Mutual.
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Eighty-five percent of Americans are financially anxious, and 36% say it has gotten worse in the past three years, according to the 2016 Northwestern Mutual Planning & Progress Study.

Only 14% say their feelings of financial anxiety have improved, and nearly one-third, 28%, say they worry about their finances every day.

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Americans’ two biggest financial fears are facing an unplanned financial emergency (38%) and incurring an unplanned medical expense due to an illness (34%). These outpaced outliving their retirement savings (21%), losing their job (17%) or being unemployed for an extended period of time (15%). When asked what the source of their financial concerns are, 55% said unexpected expenses, followed by saving for retirement (29%), health care costs (27%), mortgage or rent (25%), credit card debt (25%) and student loan debt (13%).

A recent Federal Reserve Survey found the number one reason employees says they do not participate in their employer-sponsored retirement plans is they cannot afford to contribute.

“There’s the sense that people are just staying afloat, that they’re meeting their most immediate financial needs but that they are worried about what they can’t see or don’t expect,” says Rebekah Barsch, vice president of planning and sales at Northwestern Mutual. “They fear the unknown. They don’t know how to plan for the unplanned, and they worry that if something unexpected happens, it could have deep and lasting consequences.”

Asked what they think are the benefits of financial security, 52% said “peace of mind that I never have to worry about day-to-day expenses,” 22% said the “flexibility to live a desired lifestyle,” and 8% said “freedom to pursue my dreams.”

Harris Poll surveyed 2,646 adults between February 1 and February 10 for Northwestern Mutual. The 2016 Northwestern Mutual Planning & Progress study can be downloaded here.

Investing June 8, 2016

Now Is Not the Time for De-Risking DBs

Market volatility and funding relief allowing lower required contributions have impacted the value of LDI and other pension plan de-risking strategies, SEI says.
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“We’ve been big proponents of derisking [pension plans], such as using LDI strategies that reduce risk as funded status rises,” says Tom Harvey, director of the Advisory Team within SEI’s Institutional group in Oaks, Pennsylvania.

However, he tells PLANSPONSOR that, depending on plan size, now is not the time for most defined benefit (DB) plan sponsors to de-risk or annuitize their plans.

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In a Q&A on SEI’s website, Harvey explains that “the goal of de-risking strategies is to minimize volatility between the investment asset pool and the pension liabilities, based on how pension liabilities are calculated for accounting and funding purposes. Reducing the swing between these two measures creates more certainty for both the projected funding gap and required contributions. Currently, these two measures—generally accepted accounting principles (GAAP) and Employee Retirement Income Security Act (ERISA) funding—have diverged. This has created an environment for most plan sponsors where surplus volatility against the liability doesn’t trigger additional contributions, thus reducing the value of the LDI strategy.”

Add to that new funding relief that lowers required contributions for DB plans, and Harvey says DB plans’ funding status is going down. “If plan sponsors haven’t been using LDI aggressively in the past, now is not time to do that or to annuitize because now they will have to pay an insurer more to move assets,” he says.

NEXT: Pursue greater returns

According to the Q&A, the current environment “allows plan sponsors pursuing return-oriented strategies to continue those strategies without the near-term potential of being required to make funding contributions.” Harvey tells PLANSPONSOR DB plan sponsors need to think more about other assets classes they may have been skittish about. It is a necessity to evaluate whether they need to bring in more equity—private equity, long/short strategies, or international funds. “They need to prop up returns without increasing overall plan volatility,” he says.                       

“In the current environment, a plan sponsor pursuing an LDI strategy most likely needs to make supporting discretionary contributions to the plan—and forego the benefits of deferred funding. For most plan sponsors, that may not be optimal, as there’s likely a better use of their capital than pension plan contributions,” the Q&A says. However, Harvey notes that SEI is not suggesting all plan sponsors need to unwind their LDI strategies. It depends on the size of the plan, the size of the plan liability relative to market capitalization of the plan sponsor, as well as the plan sponsor’s specific risk management goals.

“Most plans should have a combination of a degree of funded status at which they can afford to de-risk and a normalized interest rate environment on corporate bonds. When they see these triggers, they can jump to annuitize,” Harvey concludes.

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