Tag Archives: Jeff Marzinsky

Defined benefit plan investments: Planning for the future now

Marzinsky-JeffDuring December 2014, U.S. equity markets peaked at all-time highs—over 18,000 for the Dow Jones Industrial Average and 2,090 for the S&P 500 Index. Then, in January, equity markets became more volatile and both indexes pulled back dramatically, as international economic uncertainty rose and oil prices fell. Some thought interest rates couldn’t go any lower during 2014 with the U.S. Federal Open Market Committee (FOMC) hinting at an upward adjustment. But interest rates on the longer end of the maturity spectrum dropped during 2014, which most likely had a detrimental effect on defined benefit (DB) pension plan liabilities.

Now, more than ever, plan sponsors should be reviewing their DB plan investments as we react to these market movements, which are critical in the asset allocation process. For more perspective on the shifting landscape, see my paper “Developing pension plan investment strategy: A variety of considerations,” published last year to help DB plan sponsors understand the range of considerations and how they interact in the development of a pension plan investment strategy.

Developing pension plan investment strategy: A variety of considerations

Investment committees face a variety of considerations when managing pension plans. In the past, these committees focused mainly on strategies for investments, but now they need to consider multiple dimensions. Taken together, the multiple aspects affect the value of plan assets and liabilities when effectively managing a pension plan. They also affect the development of an investment strategy for the plan assets. As a pension plan sponsor, it is important to fully understand the various areas that will affect the volatility of assets, liabilities, and contributions on the pension plan and to develop a strategy that will lessen this impact. This paper authored by Jeff Marzinsky offers some perspective.

Target date funds: A fiduciary review process is crucial

Jeff_MarzinskyRetirement plan participants are often told that target date funds (TDFs) are a “set it and forget it” investment. Many sponsors have similar feelings when selecting a TDF series. Still, it is important for them to constantly monitor the fund series subsequent to its initial review. Sponsors need to focus on fees, asset allocation along the glide path, performance, and expenses. Looking at a combination of indexes and peer groups can offers sponsors better perspective on a suitable investment philosophy.

Plan Sponsor recently published an article focusing on four areas to revaluating TDFs. In the following excerpt from the article I discussed the importance of reviewing a fund’s investment strategy.

That sort of analysis is especially important because some target-date funds have made significant changes in recent years. Look for issues such as alterations to the glide path, a move from active management to enhanced index or indexing strategies, or switches in the underlying funds, suggests Jeff Marzinsky, a principal at consultant Milliman Inc. in Albany, New York. He has seen sponsors actually replace their target-date funds, mainly in cases of investment underperformance or changes in the funds’ underlying philosophy.

I also provided perspective regarding an increased interest in custom target date funds, which offer sponsors control over investment options and asset allocation changes.

…It may be less about many having an employee base different enough to warrant a custom glide path than sponsors seeing it as “a better way to pick the investments,” because sponsors have more control than with off-the-shelf funds.

In a prior article, “Considerations in choosing a target date fund,” I explored some key aspects of TDFs and issues plan sponsors should bear in mind when selecting and the ongoing monitoring of a TDF series.

Developing an alpha beta allocation for your pension plan

In our recent article, “Developing an alpha beta pension plan portfolio,” we reviewed some of the basic concepts in developing allocations for pension plans. By using a combination of index and actively managed investments, known as an “core/satellite allocation,” a sponsor can diversify across a wide variety of asset classes and strategies while focusing on target return, volatility, and diversification.

The starting point, setting goals for the portfolio, allows for monitoring of the results, which include:

• Diversification: Overall allocation across classes, as well as correlation of returns
• Target return: The desired annualized return to meet retirement goal requirements
• Management expenses: The investment manager expense

Index investments represent the beta, or the market return that is the basis of the portfolio. Active managers can be used to generate the alpha, returns in excess of the market (or index) return. Also, active managers can be used to moderate downside risk in declining markets. The combination of the two approaches can be a prudent strategy in developing an alpha beta portfolio.

Pension plan investment returns: Some thoughts and observations

With market volatility of stocks very apparent these days and interest rates on fixed income investments at historic lows, what can a plan sponsor, or the investment committee, of a defined benefit pension plan do to manage portfolio returns?

Asset allocation
We’ve all heard that asset allocation is one of the most important drivers in the return of an investment portfolio. One of the often overlooked aspects of this is setting a rebalancing policy, too. When equities gain value, pushing that side of the portfolio outside of preset allocation ranges, having a rebalancing policy allows the portfolio to capture some of the gains and bring the expected risk/return profile of the plan back into the defined targets. This can be as simple as noting in the policy that if an asset category moves more than 5% above its stated target weight in the portfolio, some will be trimmed and reinvested among the other assets that are presumably under-weighted.

Look at plan expenses
If the plan allocates expenses related to plan administration to the investment portfolio, it is good fiduciary practice to look at those expenses and determine if they are reasonable and fair.

Where are some areas to look?

  • Trust/custody services
    • You may have a good relationship with your trustee/custodian and they may do great work. But are the fees fair for the services provided?
    • Have assets grown since you switched providers? Your fee may be based on asset size and may have gone up as well.
    • Take a look at other providers, or consider asking your current provider for a discount.
  • Investment management fees (this has a lot of avenues to look at!)
    • Are you in the right vehicle? Based on the plan size, what is a good investment: mutual fund, ETF, separate account?
    • For the investment, is the expense fair compared to other managers in the category?
    • Is your manager or consultant getting “soft dollars” for sending assets or trades to a certain manager/brokerage?

Asset allocation is important; it does drive the return and level of risk of the portfolio. Keep an eye on this and set a policy for monitoring and for when rebalancing occurs. Much scrutiny has been placed on defined contribution (DC) plan expenses as of late and little emphasis on defined benefit plans. As a fiduciary, you need to keep an eye on expenses for your defined benefit plan as well. This is especially true if they are being passed through and paid from the investment trust, because they are directly affecting the return of the portfolio. I’ve written a number of DC plan fiduciary-related articles, and now it’s on to DB this year, so stay tuned.

The most important retirement stories of 2011

If you’re like a lot of people, you’re probably anxious to put 2011 in the rearview mirror. Yet the biggest stories of 2011 could play out for years to come. So let’s take a look in that rearview mirror and see if there’s anything we can learn from some of the key stories we tracked on Retirement Town Hall in 2011.

A record nobody wants to break
In the third quarter of 2011 the Milliman Pension Funding Index had its second-worst quarter in the history of the study (read the full story). Like a consecutive losses streak, nobody wants to break any records for worst quarter in the study.

How will underfunded pensions start to dig out in 2012? “With interest rates remaining at historic lows and low expectations for investment gains, plan sponsors will be facing record levels of contribution requirements in 2012 and 2013,” says John Ehrhardt.

Risky business
The Department of Labor (DoL) gathered experts to discuss the trend towards using investments with higher rewards but higher risks in pension plans (read the full story). Investing is all about risk and reward but pension plan managers face unique circumstances when investing people’s retirement money. That’s why many are exploring new approaches to managing this risk.

“The risk management techniques used by variable annuity providers saved insurance companies $40 billion during the financial crisis,” says Tamara Burden. “Pension plans can benefit from similar techniques, especially in this time of record-low interest rates.”

No more Social Security blanket
Changes are afoot at the Social Security Administration (SSA). In 2011 the SSA announced its plan to stop issuing paper checks (read the full story) and statements (read the full story). These moves are certainly eco-friendly, but they are really intended to help the SSA’s bottom line.

What effect will these changes have going forward? “As the world becomes more reliant on technology, electronic deliverables like these make more sense from both a practicality and cost standpoint,” says Tim Connor. “Get used to it, embrace it, and take part in it.”

Downgrades, they’re not just for hurricanes
The day some thought would never come came in 2011. The S&P’s downgrade of the United States was a dramatic event within the investing world that affected nearly everyone (read the full story). The downgrade led to immediate volatility, at the time.

What will be the lasting effects of the downgrade on those who manage retirement plans? “As humans we tend to forget, most of the initial effects of the downgrade have subsided, investors are still buying U.S. debt,” says Jeff Marzinsky. “However this should not lead investors to a false sense of security. The U.S. economy is improving, but still fragile, markets are volatile, and interest rates continue to remain low.  Investment policy and diversification are key areas to keep a close eye on, more than ever.”

As exciting as watching paint dry
It’s more of a non-story than a story, but 2011 was something of a regulatory vacuum in which employers operating both defined contribution (DC) and defined benefit (DB) plans waited and waited and waited for regulatory guidance on key issues…and are still waiting.

“There are numerous examples where some regulatory guidance would be quite welcome for plan sponsors,” says Charles Clark. “There are holes in the DB funding rules, many questions still swirling around disclosure rules, and new uncertainty around cash balance plan regulations, just to name a few.”

Target-date funds: Know the risk

An article at Workforce.com looks at the growing popularity of target-date funds. These funds have proven to be useful retirement vehicles for many plan participants, but they are not without certain risks. Here is an excerpt from the article:

For plan sponsors considering a target-date fund, knowing whether the fund goes to or through retirement is critical, experts say. Funds that go to retirement hit their most conservative asset allocation near the retirement date, while through funds don’t hit their most conservative point until after the fund date name.

“Plan sponsors really need to have a good understanding of what they have so they can clearly communicate and monitor” their target-date funds, says Jeff Marzinsky, principal and investment consultant for Milliman in the consulting firm’s Albany, New York, office. “If participants aren’t aware [of the type of plan they are in], they may be taking more risk than they thought.”

Target-date funds: Plan sponsor considerations

Jeff_MarzinskyA new Milliman Benefits Perspective article goes deeper into the details of target-date funds (TDFs) and considerations for plan sponsors, which we looked at in a previous blog entry.

Some of the issues addressed in the article:

  1. Growth in TDFs, especially in retirement plans, can in part be attributed to the qualified default investment alternatives (QDIAs) regulations released in 2006 and 2007.
  2. In 2008 and 2009, many TDFs decline in value significantly, even though they were close to or at their target dates.
  3. More on the “To versus Through” difference between funds.
  4. Some considerations for sponsors as they include TDFs in their plans: required disclosures, communications, and ongoing benchmarking.

You can find the article in the October edition of the Milliman Benefits Perspectives.

The United States has been “downgraded”: What can investors do now?

Jeff_MarzinskyThe S&P downgrade is no doubt one of the most historic valuations in recent memory. What should a plan sponsor or investor do in light of the recent downgrade?

  • U.S. debt: In light of the S&P downgrade, both Fitch and Moody’s have noted that they will keep the AAA and Aaa ratings for the time being.  On August 9, the Federal Reserve auctioned around $32 billion in debt to the public without a blink. Seems the rating downgrade has not led to investors shying away from U.S. debt.
  • Interest rates: With the downgrade, the rates may go up in light of the presumed risk related to the rating. Adjustments in rates will affect bonds, as well as pension plans. Moving interest rates will have more of an effect on longer durations. Review the duration of bond holdings and consider diversification across short, intermediate, and long durations to lessen the impact of changing rates.
  • Investment policy: With the S&P downgrade, investors should review their investment policy statements (IPS) to see if there are terms that require bond holdings to maintain AAA or Aaa ratings. If this is the case, the IPS may need to be adjusted; alternatively, liquidations of bond investments not meeting this requirement may be necessary.
  • Diversification: We have already seen a great deal of volatility since the downgrade, and going forward we may see continued discomfort in the markets, both bond and stocks. As has always been the case, diversification is key. A mixed portfolio of U.S. stocks, bonds, and international stocks and bonds are key in managing some of the volatility we’re seeing in the U.S. markets.
  • Stay the course: Invest for the long term. Don’t make rash decisions, in particular after dramatic stock market fluctuations. Set a policy, adjust it as necessary, and think before making knee-jerk reactions to market declines.

One thing is certain: There will be many debates over the right course of action, as much will unfold over the coming months.

Your 401(k) plan has auto-enrollment, now what?

Jeff_MarzinskyThere has been a good deal of discussion on success measures for auto-enrollment, and we’ve previously established that by adding auto-enrollment a plan sponsor can immediately make its plan appear to have 100% participation. But is that enough?

Consider the basic fact that participation in a 401(k) plan is only one hurdle in making a retirement plan successful. Is a 3% contribution rate good? It may or may not be. In our recent informal online survey, the results indicated that the most popular rates, as shown in the pie chart below, tend to be those that are just enough to maximize the employer matching contribution, followed by 10% of salary