Monthly Archives: July 2010

401(k) fees under the microscope

The New York Times looks at the sometimes opaque world of 401(k) fees—and how new rules may contribute to a more transparent dynamic in the future. Here is an excerpt:

How, you may ask, can an employer set up a 401(k) plan for its workers and not know the cost? Employers may know the overall expense, but untangling the specifics is where the exercise gets murky because many 401(k) providers “bundle” their services — for record-keeping, investment management and custodial services, among other things. (Some providers, including Putnam Investments, already break out this information.)

“I’ve seen small companies, and I’ve seen very large companies that have hundreds of millions of dollars in the plan who do not understand what they are paying,” said Jeff Marzinsky. a principal with Milliman, a consulting firm.

Confusing matters further, many 401(k) service providers may also engage in revenue sharing. In that case, a mutual fund, typically one whose investments are actively managed, pays a 401(k) provider to handle some of the administrative duties (like record-keeping) associated with being in the plan. But the arrangements are often so complicated that it’s not always easy for employers to determine if investors are getting a prudent deal, even though that’s their responsibility.

For more on revenue sharing, see Jeff Marzinsky’s white paper from 2007.

How can an annuity fund long-term care?

The Chicago Tribune poses, and answers, this question:

Q. My wife and I are 84 and considering a retirement home. I read about a provision in the Pension Protection Act that would allow long-term care costs to be paid tax-free through an annuity. We have an annuity with a surrender value of more than $300,000. What part of this could help us pay our monthly bill?– R.M.

A. First, you need to evaluate whether you would owe taxes on annuity withdrawals, said Montgomery Taylor, an accountant and financial planner in Santa Rosa, Calif.

If the value of your contract is down to basically what you put into it (all too common these days), you could owe no tax, and thus have no need for a tax break, Taylor said.

That said, the Pension Protection Act of 2006 did create a tax break for annuity owners that began this year. While you don’t get a break on direct long-term care costs, you can qualify for tax-free annuity withdrawals that are used to pay for long-term care insurance premiums. If you end up needing the insurance, your coverage could equal two to three times the value of the annuity policy, experts said.

Some hybrid annuity/long-term care products have been available in recent years, though several insurers are developing new products to take advantage of the provision, said Carl Friedrich, a principal with Milliman, an insurance industry consulting firm.

The worst financial quarter since the 2008 crisis

Pensions and Investments picks up on the results of the June 2010 Pension Funding Index. Here is an excerpt:

The combined funded status of the 100 largest U.S. corporate defined benefit pension plans studied by Milliman decreased by $83 billion in June, dropping the funded ratio 10.7 percentage points to 84.4%.

“The second quarter of 2010 was the worst three-month period we’ve seen since the meltdown of 2008,” John Ehrhardt, Milliman principal, consulting actuary and co-author of the Milliman 100 Pension Funding Index, said in a news release. “The cumulative asset performance for these 100 pensions (for the quarter) was a loss of 3.62%, resulting in a decline in funded status of $171 billion.”

How are corporate pensions approaching asset allocation?

Reuters looks at how corporate pensions are taking a longer-term approach to their inestments. Here is an excerpt:

Pension funds are buying more bonds and paring investments in stocks in the aftermath of the financial crisis as more baby boomers seek safer investments ahead of retirement.

The oldest of the baby boomers, the millions of Americans born between 1946 and 1964 in the population boom after World War II, will turn 65 next year.

Trends for 2009 and 2010 so far indicate that allocating 60 percent to equities — standard for pensions before the market collapse of 2008 — may never return, according to the author of an annual study on the subject.

Corporate pension plans are likely to trim exposure to stocks to about 50 percent and permanently raise allocations to bonds to roughly 35 percent — up from 30 percent before the global financial crisis, said John Ehrhardt, the study’s main author. He is principal and consulting actuary in New York at Milliman Inc., an employee benefits consulting firm.

Even after U.S. stock markets rebounded last year, equity allocations rose by the end of 2009 to just 46 percent from 44 percent at the end of 2008, according to the annual Milliman Study of defined benefit pension plans at publicly traded companies, accounting for total assets of $1.088 trillion.