Products May 2, 2014

Transamerica TDFs Consider More Than Age

May 2, 2014 (PLANSPONSOR.com) – Plan sponsors need to offer a greater variety of target-date fund glide path options to meet the differing needs of participants, Transamerica says in a new white paper.
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According to “Customized Glide Path and Portfolio Construction” from Transamerica Retirement Solutions, plan sponsors and advisers need a target-date funds solution that works equally well for participants who want a relatively or entirely passive role in retirement planning and those who want to take a more active role. Transamerica contends its custom glide path approach provides an answer to this need.

Jeremy Hersch, vice president and head of asset allocation services for Transamerica Retirement Solutions, tells PLANSPONSOR, “Our approach to target-date fund glide paths begins with recognizing that retirement plan sponsors and plan advisers probably don’t have as much as time as they need to in terms of choosing investment options. However, by offering them an open architecture approach, with no preferred funds, sponsors and advisers can either build their glide path from scratch or go with a pre-constructed one, depending on what’s best for their plan.”

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The paper says because participants left to their own devices generally make less than optimal decisions when choosing investments, or make no decisions at all, a solution is needed that refocuses the average participant’s attention to understandable choices they are equipped to make, and that automates investment decisions based on those choices.

“At the participant level, the goal is to simplify the investment process—asking participants what year they want to retire in and what their comfort level is with investment risk. The answers to these two questions can help in automating the investment process for participants, letting them know things that they should be doing, such as rebalancing and diversifying their investments, but aren’t ,” says the Harrison, New York-based Hersch.

The problem with most current target-date funds' glide paths, according to Transamerica, is the investment strategy is based exclusively on time horizon and cannot incorporate other participant characteristics.

To address this drawback, Transamerica’s custom glide path approach enables participants to focus on the two easy-to-understand choices—their anticipated retirement year and their personal risk preference. It then provides a series of well-diversified portfolios constructed within a framework guided by generally accepted investment principles and utilizing the investments offered in the defined contributions plan that have already been carefully screened by the plan’s sponsor.

In addition, the participant’s account is automatically rebalanced initially, and on a quarterly basis thereafter, and is gradually reallocated to a more conservative investment mix over time via a glide path to reduce risk exposure. This customized approach efficiently and automatically delivers a customized portfolio that is designed to be both age- and risk-appropriate, the paper says.

“In the past, plan sponsors were used to using whatever target-date funds were being offered by their provider,” Hersch says. "Now, there are a lot more options." He says Transamerica's approach offers sponsors and advisers flexibility, control and transparency when it comes to glide paths.

“When it comes to choosing target-date funds, the first thing a plan sponsor needs to do is to make sure the plan has an established, documented process for such selections," according to Hersch. "They also have to look at the benefits of investing in proprietary versus non-proprietary funds, depending on what level of control the plan sponsors wants over the investment options. And they have to consider the risk and objectives of the target-date funds, as well as the asset allocation.”

The main thing plan sponsors need to ask themselves is how comfortable they are with the target-date fund glide path strategy and if it is appropriate for their plan and participants, he adds.

“Every plan should have an investment policy statement (IPS) listing the objectives of the plan. And it’s good to form this policy by getting feedback from plan participants. With each participant having their comfort level with investment risk and time frame in which they want to retire, it’s good to not only choose target-date funds, and accompanying glide paths, that not only factor is your IPS’s objectives but that present enough options, in terms of risk and retirement dates, for participants,” Hersch says.

For more information about how to obtain a copy of the white paper, call 888-401-5826.

Benefits May 2, 2014

Public Pensions No Benefit for Short-Term Workers

May 2, 2014 (PLANSPONSOR.com) – Job mobility for state and local government workers could be a detriment to their retirement savings, an analysis indicates.
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The Urban Institute’s Program on Retirement Policy concludes that many workers, because they must contribute to their plans and do not usually spend their entire careers in government service, gain nothing from their state pension plans. They would have a richer retirement if they could simply invest on their own.

According to its analysis, only 19% of plans enable state and local government employees hired at age 25 to accumulate any employer-financed pension benefits within the first 10 years of employment. For teachers, the figure is just 14%.

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In 22% of all plans, age-25 hires must work more than 25 years before their future pension benefits are worth more than their plan contributions. In 39% of teachers’ plans, age-25 hires who leave before 26 years of service get nothing from their pension plans other than their own contributions.

Recent reforms, focused mainly on cutting costs, have made things even worse, the researchers contend. About one-fifth of the plans changed their benefit rules between 2010 and 2013, with half effectively raising the time that employees must serve before getting anything out of their pension plans by three years or more.

“The traditional pension plans generally provide lucrative retirement incomes to long-term employees but offer little retirement security to workers who change employers several times over their career,” says Richard Johnson, the Urban Institute’s director of the Program on Retirement Policy, based in Washington D.C. “Traditional plans tend to encourage older employees to retire early, a problematic feature as the work force grows older. These plans may complicate government efforts to recruit younger employers and retain older ones.”

At the other end of the career span, long-tenured employees in 63% of plans lose lifetime pension benefits if they stay on the job beyond age 57.

For those at mid-career, much of their benefits will be typically earned in a single year, creating strong incentives for these workers to remain on the job until they realize these windfalls, even if they are ill-suited to the job or could be more productive or satisfied elsewhere, the analysis suggests.

Employees who keep working after they have maximized their pension benefits often suffer steep losses. On average, age-25 hires lose 48% of their maximum net lifetime benefits by working until age 67, Social Security’s full retirement age for those born after 1959.

The analysis found in traditional plans, there is often a year in which lifetime benefits jump, usually by triple the worker’s salary. On average, that one-year benefit surge accounts for nearly half of the expected lifetime benefits accumulated to that point. These spikes occur most often at age 55 for employees hired at age 25. In more than 10% of traditional plans (and more than 25% of police and fire plans) the maximum annual jump in lifetime pensions exceeds six times annual salary. The maximum across all plans approaches 11 times salary.

Short-career workers end up subsidizing often extremely generous benefits received by very long-tenured retirees, the researchers conclude. Cash balance plans and other alternative benefit designs, they suggest, would enable all state and local government employees to accumulate retirement savings gradually, including those with short careers, rather than restricting benefits to those with the longest tenures. Such alternatives would also attract younger employees who change jobs more frequently than earlier generations.

The Urban Institute analyzed 660 state-administered pension plans. The plans, detailed in a database, are graded on how well they place short- and long-term employees on a path to retirement security; how well employee incentives help government attract and retain a productive workforce; and whether the plans set aside enough funds to finance promised benefits. By these measures, only 1% of the 660 plans earned an A grade, while 11% had an F grade.

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