Administration May 8, 2018

State Pension Plans Reverse Two Consecutive Years of Return Declines

“A primary driver of the improvement in the funding ratio was the increase in global equity values for the 12-month period ending June 30, 2017,” notes Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting.

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The funding ratio of state pension plans rose 2.8 percentage points to 70.2% in fiscal year 2017, according to Wilshire Consulting.

A year ago, Wilshire Consulting’s annual state funding report uncovered a funding ratio of 67.4%, and this year’s increase notably reverses two consecutive years of aggregate funded ratio declines.

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“A primary driver of the improvement in the funding ratio was the increase in global equity values for the 12-month period ending June 30, 2017,” notes Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “In fact, the estimated aggregate asset value is the highest since Wilshire began reporting on state retirement system funding levels.”

According to the report, for the 71 state-based retirement systems that reported actuarial data for 2017, pension assets grew by over 9% to reach $3,170 billion, from $2,901.7 billion in 2016. The aggregate Total Pension Liability (TPL) increased nearly 5% to $4,518 billion, from $4,304 billion in 2017.

Despite the increase in aggregate TPL, the aggregate shortfall is estimated to have decreased by $54 billion to $1,348 billion, down from $1,402. This decline in the aggregate shortfall is the result of the significant increase in aggregate assets to $3,170 billion, from $2,901.7 billion, Wilshire says.

Discount rates have trended lower over the past several years. This trend continued this year as nearly half of the plans studied lowered their discount rate. The range for discount rates in 2017 was 4.21% to 8.00% with a median of 7.25%, which is down 25 basis points from 2016.

Asset allocation varies greatly by retirement system. In aggregate, state pension plans had allocations to equity, including private equity, equal to 57.6% in 2017. Allocations to fixed income were equal to 22.8%, with the remaining 19.8% allocated to real assets, alternatives and cash.

The Wilshire 2018 Report on State Retirement Systems: Funding Levels and Asset Allocation is based on data gathered by Wilshire Consulting from the most recent financial and actuarial reports issued by 130 retirement systems sponsored by the 50 states and the District of Columbia. Of the 130 systems studied, 71 systems reported actuarial values on or after June 30, 2017 and the remaining 59 systems last reported prior to that date.

Participants May 8, 2018

Financial Wellness Education Key to Participants’ Trust in Retirement Plan Providers

A study shows that higher levels of trust lead to better financial decision-making which includes higher rates of savings, increased commitment to savings, and increased loyalty to providers.

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Americans who participate in 401(k) plans are increasingly more trusting of the financial firms they rely on to manage their retirement savings, according to the National Association of Retirement Plan Participants (NARPP) 2018 Participant Trust and Engagement study, which tracks the attitudes and behaviors of 4,500 retirement plan participants from across the country.

The study reveals that trust in one’s retirement plan provider is at 30%, an all-time high, up from a low of 26% in 2016. Following the same trend, confidence has increased to 46% from a low of 35% in 2014. The study shows that higher levels of trust lead to better financial decision-making which includes higher rates of savings, increased commitment to savings, and increased loyalty to providers.

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The study revealed factors that increase participants’ trust in retirement plan providers:

  • Education satisfaction;
  • Transparent fee information;
  • Information provided is relevant;
  • Provider is viewed as a partner; and
  • The feeling that information provided is “in my best interest.”

Forty-three percent of participants are satisfied with education they are provided.

The research found retirement plan participants are confused on topics related to fees and investing basics. Fewer than half (49%) say they know how much they’re paying in fees, 19% understand investing principles, and only 17% feel the information presented to them by their provider is in their “best interest”.

The study also highlights how stressed savers are about their finances; 53% feel very or somewhat stressed about their financial situation. Employees with higher levels of financial stress have less trust in their employer, with only one in four reporting they “trust their employer to do what’s right.” Neither household income nor level of education are related to financial stress; however, debt plays a large role in it.

Saving for retirement has strong competing financial priorities such as paying off student loans and supporting other family members. Almost half of study participants (47%) report they’ve provided support to a family member in the past 12 months.

Financial wellness is top of mind. Nearly 40% of participants report they’ve taken steps in the past twelve months to reduce debt and make other financial wellness decisions.

“This study shows that for financial firms who want to improve retirement savings outcomes must evolve their role from just account providers to trusted partners that people can turn to for help on holistic financial wellness,” NARPP says.

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