By Cyril Tuohy
With employers’ attention turned toward the Affordable Care Act and how health reform will affect their employee populations, retirement plan advisors might want to think about defined contribution and defined benefit strategies for 2014, so that their clients don’t have to.
These retirement plan suggestions come courtesy of Mercer, the global talent, health and retirement consultant, who points out that litigation, audit and public-relations risk have made offering defined contribution plan advice trickier than it used to be.
Mercer said advisors should think about how companies can move beyond simple defined contribution plan metrics such as participation rates and deferral percentages. Better metrics – illustrating how much in a plan today will mean for withdrawals in the future, for instance – boost participation rates, Mercer said.
Though target-date retirement funds are more popular with defined contribution plans than they used to be, target-date investments have come under more Department of Labor scrutiny and plan advisors would do well to consider whether such funds are right for employees, Mercer said.
Mercer also notes the importance of flagging whether some plan participants pay more in fees because of certain funds’ “revenue sharing” agreements.
Advisors should work with their plans to discuss a “diversified inflation option,” Mercer also said, as inflation has whittled away at the dollar’s purchasing power by more than 20 percent over a 13-year period from 2000 to 2013.
Employers can do their employees a favor by limiting the number of funds to 10 or less. Better to have fewer funds than too many, and to keep employees focused on their day jobs than to fiddle with too many fund choices, Mercer said. Offering too many funds risk leaving employees with “investment paralysis.” That said, it wouldn’t hurt for plan sponsors to offer an international investment or two.
Nor does it ever hurt for companies to put a defined contribution plan out to bid. Many companies get into the habit of putting their plans on autopilot when the industry offers better-performing, lower cost options, Mercer said.
Lastly, Mercer said it’s important for defined contribution plans to communicate with plan sponsors and their employees using mobile strategies. Plan sponsors should optimize education and administrative strategies for smartphones and tablets.
Defined contribution plans held more than $5.3 trillion in assets as of June 30, according to the mutual fund industry trade group Investment Company Institute (ICI).
Regarding defined benefit plans, which have seen their funded status rise with higher stock market returns, advisors might want to think about interest rate or funded status triggers to help lock in rate increases when they occur, as many analysts anticipate the Federal Reserve easing its bond buying program. Plan sponsors have also considered time-based triggers to end their pension plans on a specific date, Mercer said.
Mercer also said it anticipates more defined benefit plans will use interest rate derivatives in 2014 as part of their liability-driven investing program.
Some plan sponsors might also consider accelerating discretionary contributions to their defined benefit plans to boost the funded status of the plan. Conversely, advisors might also want to help plan sponsors develop a strategy to deal with plans running a surplus, thanks to robust stock market returns.
“Surpluses in pension plans can potentially be managed by merging underfunded plans into overfunded plans arising, for example, from M&A acquisitions, paying for retiree medical costs and shifting other types of benefits into the overfunded plan,” Mercer said.
Of particular importance to advisors is ensuring that plan sponsors who have delegated investment responsibilities in the “derisking” of their pension plans to outside managers, have done so with proper governance oversight, Mercer said.
Cashouts – lump sum payments made to former employees with vested pension benefits – are expected to rise next year as plan sponsors seek to avoid Pension Benefit Guaranty Corp. (PBGC) premium increases.
As part of the budget negotiations, PGBC premiums will rise $6 per participant to $57 per participant in 2015, and then another $10 to $67 per participant in 2016. New mortality tables are also expected to boost liabilities by 2 to 3 percent, Mercer said.
Lastly, Mercer said, annuity purchases have become more attractive because of the improvement in the funded status of pension plans. Transferring defined benefit pension plan liability to insurers “removes considerable volatility from the balance sheet and income statement,” Mercer said.
Private defined benefit pension plans held more than $2.8 trillion in assets as of June 30, according to the ICI.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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