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Insight on Plan Design & Investment Strategy
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Prudence, Performance and Quality in Target-Date Funds

Mon, 2019-11-11 11:39
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Some weeks ago, PLANSPONSOR covered the publication of a new report exploring the correlation of market share and quality among target-date funds (TDFs).

The report suggests that there exists a “fair amount of correlation between market share and the quality of a target-date fund vis-à-vis its peers in the target-date category as measured by an industry-recognized fund scorecard.” In this case, analysts utilized Fi360’s Fiduciary Scores to conduct their research.

According to the study, the correlation between market share and third-party rated quality is “especially strong” in the bottom 100 target-date families by market share. In other words, none of the smallest target-date funds have favorable Fi360 Fiduciary Scores. Important to note, the research authors emphasize that, in the practical operation of retirement plans, a simple assessment of market share alone obviously cannot be used as a substitute for normal TDF due diligence. Still, they conclude, it can be instructive to analyze the market traction of a given TDF product.

Responding to this reporting, Ron Surz, a regular reader and the president of Target Date Solutions and GlidePath Wealth Management, submitted some timely analysis of his own, emphasizing the need for caution when talking about TDF “quality” in isolation of a deeper discussion of risk tolerance and performance expectations.

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As Surz has discussed previously with PLANSPONSOR, there is often a heavy weight placed on one, three and five-year performance, including in objectively generated TDF ratings. This makes sense to some extent, because risk-adjusted performance is very important to participant outcomes. But, Surz says, the “risk adjusted performance” element is often overlooked, and analysts are not necessarily concerning themselves sufficiently with how the most popular TDFs may perform in periods of severe market stress. Surz even says that many analysts “reward TDF imprudence.”

An Alternative View

Surz has generated his own “TDF Prudence Score” system that, generally speaking, favors a very different set of TDFs versus funds rated highest by a Morningstar or Fi360.

What is the reason for this? Surz says the biggest TDFs have become the biggest in part because they have taken more risk relative to their peers, and they have been rewarded for doing so by what has turned out to be the longest running bull market in U.S. history. But matters could have easily turned out differently, and markets are sure to sour one day in the future. Thus, in Surz’s view, TDF investors are not adequately being informed about the risk they carry in what many falsely believe to be safe or even guaranteed investments. Prudent TDFs, in his view, soberly balance the need for return with the need to protect retirement investors’ hard-earned dollars, especially during the critical time period that immediately precedes and follows the retirement date. 

Surz offers the following a summary of what he think fiduciaries should know about target date funds:

  1. Beware the performance trap. Imprudent concentration in U.S. stocks has won the performance horserace in the past decade.
  2. Protect against lawsuits, looking beyond costs. Fiduciaries want protection from lawsuits, so they choose popular TDFs, but they may be unsafe for beneficiaries. Surveys of beneficiaries reveal that they want a lot less risk near retirement than they get in popular TDFs.
  3. Address decumulation. More plan sponsors are encouraging retirees to stay in the 401(k), probably even more in union plans.
  4. Evaluate performance. There is no standard, but there should be.
  5. Address demographics: The only demographic that defaulted participants have in common is financial disengagement.
  6. Protect beneficiaries. Consider the trade-off between growth and preservation, especially near retirement. There are different schools of thought.
  7. Choose between “To” or “Through.” Absent a discussion of many other important factors, this is a distinction without a meaningful difference.
  8. Diversify. This remains the only free lunch in investing.
  9. Manage risk. Dr. William F. Sharpe won a Nobel Prize for the Capital Asset Pricing Model that controls risk by blending a “risk-free” asset with the global market of risky assets. Ibbotson calls this the “Separation Principal” because it dictates just two assets: risk-free and the world market.  
More Tips on How to Carefully Evaluate Target-Date Funds

Surz is far from the only analysts asking big questions about the TDF marketplace and how to best serve retirement plan participants, who, given their general lack of investment expertise, rely heavily on both their fiduciary plan sponsors and on product manufacturers to look out for their best interest. Given their widespread use as the default investment in many plans, TDFs are projected to hold more than half of all retirement plan assets by 2025.

Brendan McCarthy, head of defined contribution investment only (DCIO) national sales at Nuveen, tells PLANSPONSOR it is more critical than ever that retirement plan advisers and sponsors carefully evaluate TDFs in their lineup.

“We are seeing a huge focus on the QDIA [qualified default investment alternative], with advisers employing the three R’s,” McCarthy says. “The first is to reevaluate the TDF. The second is to replace it if it is found to not be appropriate, and the third is reenrollment, which is a great way to get a plan back on track in terms of where participant allocations should be.”

In addition, as exposed following the Great Recession of 2008, “there is an alarming amount of variation in risk composition from one target-date fund manager to the next,” Newport Group writes in a white paper, titled, “A Prudent Approach to Evaluating Target Date Funds.” The firm believes that prudent selection of a target-date manager must consider many factors beyond the basic intention of the strategy.

“Some managers will choose the conservative path and dial down equity exposure early,” the firm says. “Other managers will consider the risk of underfunding and outliving retirement assets and will maintain an aggressive posture in their portfolios for years after retirement.”

Besides the quantitative analysis of performance, there are qualitative factors to consider, according to Newport Group, most important of which is the diversification of the underlying holdings in the TDF. “Is there sufficient diversification across asset classes and sub asset classes?” Newport Group queries. “Are nontraditional and lower correlated asset classes such as REITs [real estate investment trusts], emerging markets, global bonds and high yield bonds included?”

The post Prudence, Performance and Quality in Target-Date Funds appeared first on PLANSPONSOR.

Categories: Industry News

Maximum Benefit and Contribution Limits Table 2020

Mon, 2019-11-11 11:21
Maximum Benefit/Contribution Limits for 2015-2020
As Published by the Internal Revenue Service

PDF of with Maximum Benefit/Contribution Limits for 2010-2020 available here.


202020192018201720162015Elective Deferrals (401k
& 403b plans) $19,500$19,000$18,500$18,000$18,000$18,000Annual Benefit Limit $230,000$225,000$220,000$215,000$210,000$210,000Annual Contribution Limit $57,000$56,000$55,000$54,000$53,000$53,000Annual Compensation Limit $285,000$280,000$275,000$270,000$265,000$265,000457(b) Deferral Limit $19,500$19,000$18,500$18,000$18,000$18,000Highly Compensated Threshold $130,000$125,000$120,000$120,000$120,000$120,000SIMPLE Contribution Limit $13,500$13,000$12,500$12,500$12,500$12,500SEP Coverage Limit $600$600$600$600$600$600SEP Compensation Limit $285,000$280,000$275,000$270,000$265,000$265,000Income
Subject to
Social Security $137,700$132,900$128,400$127,200$118,500$118,500Top-Heavy Plan Key Employee Comp $185,000$180,000$175,000$175,000$170,000$170,000Catch-Up Contributions




$6,000$6,000$6,000SIMPLE Catch-Up Contributions $3,000$3,000$3,000$3,000$3,000$3,000

The Elective Deferral Limit is the maximum contribution that can be made on a pre-tax basis to a 401(k) or 403(b) plan (Internal Revenue Code section 402(g)(1)). Some still refer to this as the $7,000 limit (its original setting in 1987).

The Annual Benefit Limit is the maximum annual benefit that can be paid to a participant (IRC section 415). The limit applied is actually the lessor of the dollar limit above or 100% of the participant’s average compensation (generally the high three consecutive years of service). The participant compensation level is also subjected to the Annual Compensation Limit noted below.

The Annual Contribution Limit is the maximum annual contribution amount that can be made to a participant’s account (IRC section 415). This limit is actually expressed as the lessor of the dollar limit or 100% of the participant’s compensation, applied to the combination of employee contributions, employer contributions and forfeitures allocated to a participant’s account.

In calculating contribution allocations, a plan cannot consider any employee compensation in excess of the Annual Compensation Limit (401(a)(17)). This limit is also imposed in determining the Annual Benefit Limit (above). In calculating certain nondiscrimination tests (such as the Actual Deferral Percentage), all participant compensation is limited to this amount, for purposes of the calculation.

The 457 Deferral Limit is a similar restriction, applied to certain government plans (457 plans).

The Highly Compensated Threshold (section 414(q)(1)(B)) is the minimum compensation level established to determine highly compensated employees for purposes of nondiscrimination testing.

The SIMPLE Contribution Limit is the maximum annual contribution that can be made to a SIMPLE (Savings Incentive Match Plan for Employees) plan. SIMPLE plans are simplified retirement plans for small businesses that allow employees to make elective contributions, while requiring employers to make matching or nonelective contributions.

SEP Coverage Limit is the minimum earnings level for a self-employed individual to qualify for coverage by a Simplified Employee Pension plan (a special individual retirement account to which the employer makes direct tax-deductible contributions.

The SEP Compensation Limit is applied in determining the maximum contributions made to the plan.

EGTRRA also added the Top-heavy plan key employee compensation limit.

Catch up Contributions, SIMPLE “Catch up” deferral: Under the Economic Growth and Tax Relief Act of 2001 (EGTRRA), certain individuals aged 50 or over can now make so-called ‘catch up’ contributions, in addition to the above limits.

The post Maximum Benefit and Contribution Limits Table 2020 appeared first on PLANSPONSOR.

Categories: Industry News

Firms Estimate DB Funded Status Improvements in October

Mon, 2019-11-11 09:04

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 1% in October to 85%, as a result of an increase in equity markets, according to Mercer.

As of October 31, the estimated aggregate deficit of $371 billion decreased by $34 billion as compared to $405 billion measured at the end of September. “We saw the S&P 500 reach an all-time high in October, but persistently low interest rates have kept funded status from improving further. The looming question is whether we will see an end to this bull market in light of the historic run over the past decade. With low rates putting pressure on 2020 budgets, and the risk of a late-year market correction, plan sponsors should understand the sensitivity of 2020 pension liability and expense to rapidly changing market conditions,” says Matt McDaniel, a partner in Mercer’s wealth business.

River and Mercantile points out in its Retirement Update that discount rates remained relatively flat in October, only increasing 0.003%. However, current rates are still down over 1% since year-end 2018 and are 1.3% lower than rates from this time last year. The FTSE pension discount index finished October at 3.14%.

Softening trade and geopolitical tensions, as well as improving economic data, spurred a risk-on appetite. Given the rally, emerging market equities increased by 4.2%, outperforming both U.S. equities and international developed equities which returned 2.2% and 3.6%, respectively. Bond markets were primarily flat for the month, with the exception of high-yield bonds, which saw a small increase in returns at 0.5% as spreads compressed. As a result, equities and other risk assets performed well, which benefited funding levels for the month.

However, Michael Clark, director and consulting actuary at River and Mercantile, warns, “With changes in pension discount rates so far in 2019, many plan sponsors may be in for a big surprise when their year-end balance sheet pension liability has increased, even with the positive equity returns during the year. It’s imperative that plan sponsors understand how this might affect their financials with year-end just around the corner.”

Other firms also estimated an increase in defined benefit (DB) plan funded status for October, due to positive equity returns. The aggregate funded ratio for U.S. corporate pension plans increased by 1.1 percentage points to end the month of October at 86%, according to Wilshire Consulting. The monthly change in funding resulted from a 0.9% increase in asset values and a 0.3% decrease in liability values. Despite September and October’s increases, the aggregate funded ratio is estimated to be down 1.5 percentage points and 5.9 percentage points year-to-date and over the trailing 12 months, respectively.

According to Northern Trust Asset Management, the average funded ratio of corporate pension plans improved in October from 84% to 84.6%. Legal & General Investment Management America (LGIMA) estimates the average plan’s funding ratio increased 1% to 80.2% in October.

Both model plans October Three tracks gained ground last month: Plan A improved more than 1% in October but remains down more than 3% for the year, while Plan B gained less than 1% and is now close to flat through the first ten months of 2019. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

According to the Aon Pension Risk Tracker, S&P 500 aggregate pension funded status increased in the month of October from 84.3% to 85.1%. However, during 2019, the aggregate funded ratio for U.S. DB pension plans in the S&P 500 has decreased from 86% to 85.1%.

The post Firms Estimate DB Funded Status Improvements in October appeared first on PLANSPONSOR.

Categories: Industry News

Retirement Industry People Moves

Fri, 2019-11-08 12:53

Art by Subin Yang

Cohen & Steers Appoints Sony Music VP to Board of Directors

Cohen & Steers Inc. has appointed Dasha Smith to its board of directors and as a member of the board’s audit committee, compensation committee, and nominating and corporate governance committee

Smith’s appointment expands the board of directors to nine members and increases the number of independent directors to six. She is the executive vice president and global chief human resources officer for Sony Music Entertainment. In this role, Smith is a member of the global leadership team, responsible for global human resources and corporate responsibility strategies and operations. She plays a key role in developing Sony Music’s culture and future-forward strategies.  

Prior to joining Sony Music, Smith served as the managing director in the office of the chairman and as global chief human resources officer for GCM Grosvenor, a global alternative investment firm. At GCM Grosvenor, Smith was a member of the executive management committee, where she managed the human resources, marketing, investor relations, administration, facilities and operations, diversity and corporate and social responsibility functions.

FTJ Retirement Advisors Partners with Retirement Planning Marketplace Company

Brian Holland, director of Forrest T. Jones (FTJ) Retirement Advisors in Kansas City, has announced his firm’s new affiliation with PlanMember Securities Corporation. As a new PlanMember Financial Center, FTJ Retirement Advisors is expected to expand retirement and investment planning and financial education opportunities for investors, including educators and employees of nonprofit organizations and associations in Kansas City and other cities in Missouri.

PlanMember specializes in the 403(b), 457(b) and 401(k) marketplace, while Forrest T. Jones is a family-owned enterprise providing insurance and financial planning programs.

“Affiliating with PlanMember as a financial center is really a next step toward providing educators, non-profit organizations, associations, individuals and families with complete holistic retirement planning services,” says Holland. “We strive to provide education and guidance to all our clients, enabling them to make informed financial planning decisions that are right for their own unique situations.”  

Edelman Financial Engines Appoints Workplace Business Leader

Edelman Financial Engines has appointed Kelly O’Donnell to lead its workplace business. In this role, O’Donnell will report directly to the company’s president and chief executive officer, Larry Raffone. She is based in Boston. 

Previously, O’Donnell served as chief administrative officer and chief risk officer, overseeing the company’s strategic plan and expansion of capabilities through mergers and acquisitions.

“Kelly’s in-depth knowledge of our workplace business and longstanding industry relationships will play a key role in advancing our strategy and I am excited to have her lead our workplace business into its next phase of growth,” says Raffone. “As head of Workplace, Kelly will take ownership of our workplace strategy, marketing and distribution initiatives to ensure millions of plan participants have access to comprehensive advisory and financial planning services they all deserve.”

O’Donnell is also the founder and executive sponsor of Edelman Financial Engines’ Women in Leadership program. In addition, O’Donnell’s rich experience has made her a trusted voice for testifying on industry issues on Capitol Hill, presenting at financial technology conferences on the future of innovation in the industry, and as a trusted resource for the media and analyst community on the topic of women and investing. 

Newton Promotes Investment Director

Newton Investment Management has appointed Seyi Bucknor as head of North America.

Bucknor will lead the distribution and client service functions in the region. Prior to this promotion, he served as a commercial investment director for Newton. He joined the firm in 2018 from BNY Mellon Investment Management, where he was a co-head of the manager research group.

Additionally, Bucknor had been a managing director in the investment solutions group at GE Asset Management and a director in investment research at Rogerscasey, before joining BNY Mellon in 2012.

He holds a bachelor’s degree from Cornell University and a master’s from Columbia University.

Incapital LLC Brings in CMBS Managing Director

William White has joined Incapital LLC as managing director, commercial mortgage-backed securities (CMBS), reporting to the firm’s co-heads of fixed income, George Holstead and Laura Elliot.

White will be based in Boca Raton and will work closely with Holstead and Elliot to expand Incapital’s CMBS solutions and the firm’s broader fixed-income strategy.

“With an impressive track record spanning over 20 years in the CMBS market, we are pleased to welcome Bill to our growing team,” says Holstead. “He will play an instrumental role in expanding our CMBS capabilities, and we look forward to his contributions as we continue to expand our group and develop new solutions that meet the evolving needs of our clients.”

White joins Incapital from Raymond James & Associates, where for 10 years he served as a managing director and head of CMBS trading, responsible for overseeing the firm’s efforts in the CMBS market, as well as their commercial real estate (CRE) and collateralized debt obligation (CDO) businesses. Prior to Raymond James, White worked as a director of CMBS and CRE CLO trading at Wachovia Capital Markets and as an associate specializing in residential mortgage securitization at Bank of America Securities.

He earned a master’s in business administration and a bachelor’s degree from the University of Pittsburgh; he also holds FINRA security licenses Series 7 and 63.

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Categories: Industry News

Ways to Combat Pervasive Leakage

Fri, 2019-11-08 12:49

While most retirement plan advisers and sponsors focus on ways to inspire participants to save more, on the flip side, leakage from retirement plans is a serious issue they also need to address.

According to a report from the Savings Preservation Working Group, “Cashing Out: The Systemic Impact of Withdrawing Savings Before Retirement,” which analyzed a variety of recent research and data, cash-outs from plans when people switch jobs are the most prolific form of leakage. This surpasses hardship withdrawals by eight-times and loan defaults by 130-times.

The Working Group found that at least 33% and as many as 47% of plan participants withdraw part or all of their retirement savings when switching jobs. This leakage runs between $60 billion and $105 billion a year.

The first thing advisers and sponsors need to do to help prevent leakage is to educate participants about the downsides of cashing out, taking out a loan that they might not repay in full, or resorting to a hardship withdrawal, says Mike Lynch, vice president, strategic markets, at Hartford Funds.

Participants need to know that cashing out of their retirement plan could jeopardize their retirement security, says Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Services. Participants also need to know they will have to pay ordinary taxes on the money and, if they are under the age of 59 ½, the IRS will charge them a 10% penalty, Edelman says.

“From a retirement planning perspective, this is the worst choice that they can make,” he says.

Furthermore, if a participant cashes out and immediately spends all or most of the money, they may not have adequate cash on hand to pay the upcoming taxes, warns Larry Steinberg, chief investment officer at Financial Architects, Inc.

When a participant cashes out of a plan, investment firms are required to withhold 20% of their balance in order to cover taxes, but this is just an estimate, Steinberg says. “In California, you can owe as much as 53% of a distribution, because that is the marginal federal and state tax rate for someone in the top tax bracket,” he says.

To prevent participants from taking out loans or hardship withdrawals or cashing out, employers can consider setting up automatic emergency savings accounts for them, says Mike Webb, vice president at Cammack Retirement. While these are offered by only a handful of employers, Webb is hopeful they will gain traction.

Another thing employers can do to get in front of leakage is to offer additional benefits that employees can tap into, says Tom Foster, national spokesperson for MassMutual’s workplace solutions unit. “This could include health savings accounts, 529 college savings plans, student loan programs, critical illness insurance, accident insurance, life insurance, and access to low-cost loans,” Foster says. “Sponsors can offer many alternatives, and it doesn’t cost them additional money.”

Advisers can play a critical role in this effort by “explaining to sponsors that it would be a disadvantage to them if they don’t have the right benefits to attract and retain employees,” he says.

Another thing that advisers and sponsors can do is to “offer financial wellness programs and seminars and tutorials on the basics of budgeting and setting up an emergency fund,” Foster says. And if the sponsor has decided to offer additional benefits, this is an opportunity for advisers to educate them about these various options and to help participants prioritize their dollars into these benefits, he says.

“And if the employer doesn’t offer these additional benefits, advisers can work with employees to see what financial resources they might have other than their 401(k)—be it other savings, insurance or help from relatives,” Foster says.

Foster reminds advisers and sponsors that providers have many educational tools and calculators that they can use in their efforts to combat leakage.

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Categories: Industry News