Investing June 16, 2014

Russell Realigns Equity Indexes

June 16, 2014 (PLANSPONSOR.com) – Global asset manager Russell Investments announced the annual realignment of its global equity indexes to reflect market change from the past year.
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Done each June, this year’s rebalance will impact approximately $5.2 trillion in assets benchmarked to and nearly $800 billion in assets invested in institutional and retail investment products based on the Russell Indexes. Russell has released the lists of companies set to join or leave the Russell Global Index, Russell 3000 Index and Russell Microcap Index when the annual reconstitution for its U.S. equity indexes concludes on June 27.

“Today the global equity markets receive their annual report card,” says Ron Bundy, CEO of Russell Indexes, based in Seattle. “Index reconstitution is a critical time for our global indexes and for our clients. Because this process includes our entire index family and impacts investors around the world, it is one of the most closely watched market events of the year. This year’s reconstitution is even more significant as it has been 30 years since Russell first introduced market indexes.”

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Since the Russell 1000, 2000 and 3000 Indexes were introduced in 1984, the Russell family of global market indexes has grown to reflect three decades of growth in the global equity markets. For example:

  • An original member of the Russell 3000, Apple Inc. had a market cap of $1.6 billion in June 1984. At May 30, 2014 (ranking day for 2014 reconstitution) it is $545.3 billion as Apple retains the top spot;
  • As of the beginning of 1984, total U.S. market cap was $1.8 trillion, as measured by the Russell 3000. At this year’s reconstitution, this number is $23.2 trillion; and
  • In 1984, the breakpoint between the Russell 2000 and the Russell 1000 was $255 million. At this year’s reconstitution, it is $3.1 billion.

The United States leads global equity markets to new all-time highs, with leadership shifts toward large-cap value in the U.S. as peripheral Europe rebounds, according to Russell.

For this year’s reconstitution period, from May 31, 2013 through May 30, 2014, Russell reports that the total market cap for the Russell 3000 Index, reflecting about 98% of the investable U.S. equity universe, increased nearly 18% to $23.2 trillion . The U.S. small cap Russell 2000 Index increased more than 17% to $2 trillion. And the breakpoint between U.S. small- and large-cap stocks of $3.1 billion is a new record and up 19% from $2.6 billion in 2013.

“This year’s Russell rebalance reflects continued lumpiness in the global economy, with notable shifts in market leadership and important differences across regions and countries,” says Stephen Wood, Russell Investments’ chief market strategist. “U.S. growth continues, albeit at a slower pace than 2013, with small cap, growth-oriented stocks ceding the stage to large-cap value in recent months. While structural risks remain in Europe, the region may begin to benefit from favorable European Central Bank policies. And while there are areas of opportunity in emerging and frontier markets, we also expect wide differences across countries. The diverse nature of global returns in the past year suggests the benefit of a globally diversified, multi-asset investment approach.”

In the U.S. market, the Russell 1000, 2000 and 3000 Indexes all reached new record highs in the past year. Large caps outperformed small caps during the one-year period ending May 30, 2014, with a 20.9% return for the Russell 1000 Index relative to a 16.8% return for the Russell 2000 Index. Year-to-date, performance leadership in the U.S. has shifted to large-cap value, with the Russell 1000 Index outperforming the Russell 2000 Index and the Russell 1000 Value Index outperforming the Russell 1000 Growth Index.

The largest three companies in the Russell U.S. Indexes in terms of total market capitalization at this year’s reconstitution are Apple, Inc. ($545.3 billion), ExxonMobil Corp. ($431.7 billion) and Google, Inc. ($385.6 billion).

Total market cap for the Russell Global Index, reflecting about 98% of the investable global equity universe, increased 2% to $54.6 trillion for this year’s reconstitution period, from May 31, 2013 through May 30, 2014. The global index (which includes the U.S. market) experienced an 18.1% increase for the 12-month period ending May 30, 2014, while the Russell Global ex-U.S. Index returned 15.9% for the same period. Top performing developed market countries over the last year include Spain (46.4%), Denmark (44.3%), Italy (39.6%) and Finland (38.6%). 

With a one year return of 5.7%, the Russell Emerging Markets Index lagged compared to developed markets. Top performing emerging market countries included the United Arab Emirates (75.9%), Egypt (50.3%) and Greece (27.6%). While Egypt exhibited strong performance over the last 12 months, persistent economic and market risks associated with Egypt resulted in Russell’s reclassification from emerging to frontier market status as of reconstitution 2014.

The Russell Frontier Index returned 16% in the 12 months ended May 30, 2014, with Qatar (54.5%) the top performing country. Qatar’s strong equity market growth caused its index weight to be capped at the maximum of 15%, according to Russell Frontier Index methodology.

The largest company in the Russell Global ex-U.S. Index is now Netherlands-based Royal Dutch Shell PLC with a total market cap of $254.5 billion, replacing Petrochina Co, Ltd.

The lists of projected additions and deletions for the Russell Indexes are now available at the Russell reconstitution website.

Compliance June 16, 2014

Mass. Regulator Argues for Better Disclosures of Match Changes

June 16, 2014 (PLANSPONSOR.com) – In a report sent to Congress and the Department of Labor, the Massachusetts Securities Division (MSD) is asking for improved disclosures to retirement plan participants of company match contribution changes.
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In the report, the office of the Secretary of the Commonwealth of Massachusetts William F. Galvin argues that under the existing Employee Retirement Income Security Act (ERISA) rules, employers are required to notify employees of any changes to the retirement plan, including changes to match contributions; however, current rules do not mandate that employees receive meaningful and timely disclosure of such changes. The report notes that current disclosure obligations only require the employer to inform the employee that a change occurred, not information about how that change might detrimentally impact her overall retirement plans.

The report also notes employers have up 210 days after the end of the plan year in which the change is made to make the disclosure. “Giving this material information to employees months after the change has occurred renders the disclosure totally ineffectual,” the letter says, adding that plan participants would benefit from more immediate and transparent disclosure of changes to 401(k) plans.

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Earlier this year, Galvin announced a letter was sent to the 25 largest 401(k) plan providers seeking the number of plans they administer that have shifted to year-end lump-sum matches, the number of affected employees, and the date of the change (see “Regulator Questioning Move to Annual 401(k) Match”). It also sought the disclosure of information provided to plan participants about the potential risks associated with the change.

The report says 28 firms were sent a letter. Twelve of the firms contacted did provide 401(k) recordkeeping or plan administration services. Sixteen responded that while they provided other services, they did not provide recordkeeping or plan administration services. In addition, many firms challenged the jurisdiction of the MSD in connection with requesting information regarding its services as a recordkeeper to retirement plans. Other firms indicated that providing information and records would violate the confidentiality terms of the various agreements between the firm and its plan fiduciary clients and noted privacy concerns. Two firms would not provide information absent a subpoena.

As a result of the inquiry, the Massachusetts Securities Division (MSD) found with those firms that voluntarily responded, each claimed that it was not the 401(k) recordkeeper’s obligation to know about the content and implementation of any amendments to a 401(k) plan. Moreover, none of the firms stated that they had any fiduciary duties to independently develop or issue disclosures to employees in the 401(k) plan regarding risks related to the employers’ annual match of employee contributions. Further, most of the firms were not involved in communications to participants regarding changes to plan features.

“It became clear from the MSD’s survey that the only party who has a duty to disclose plan changes is the employer or plan sponsor,” the report says.

The report indicates that while the responses received provided limited data, what was established is that if there is a trend, it is moving from periodic match employer contributions to a year-end, lump-sum contribution.

“[P]rompt congressional and [Department of Labor] action is necessary to ensure that material changes to 401(k) plans, specifically the timing of match contributions, are required to be disclosed in a full, understandable, standardized disclosure (beyond mere notification to plan participants),” the report says. “Meaningful disclosure, at a minimum, should be mandated before more companies move to year-end match contribution and specifically provided prior to that change occurring.”

A copy of the report is here.

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