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Posts Tagged ‘Jeff Marzinsky’

Developing an alpha beta allocation for your pension plan

November 7th, 2012 No comments

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

January 24th, 2012 No comments

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?

Summary
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

January 19th, 2012 No comments

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

November 17th, 2011 No comments

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

October 20th, 2011 No comments

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?

August 11th, 2011 No comments

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?

July 13th, 2011 Comments off

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

Do 401(k) retirement plan contribution limits make sense?

June 1st, 2011 No comments

Jeff_MarzinskyEach year I work with a number of clients who are retirement plan sponsors for defined contribution (DC) plans, which include 401(k) plans. In order to help them complete their annual nondiscrimination testing, we have to take their employee payroll data and run it through a series of required tests—all to make sure that individual employees have not contributed more than the applicable limit of $16,500 to their plans (with a “catch-up” contribution of another $5,500 allowed for employees of age 50 and older), and that the total amount for each individual, including any employer contributions, doesn’t exceed $49,000 for each employee (again, more is allowed if the employee is over age 50).

Taking it a step further, qualified 401(k) retirement plans must also pass a test called the actual deferral percentage (ADP) test, which may further limit the amount of deferrals certain employees may contribute to the plan. A similar test is applied to the employer matching contributions, called the actual contribution percentage (ACP) test.

Granted, not many employees bump up against the limits each year, but plan sponsors do get questions from employees as to why their deferrals were arbitrarily stopped during the year (when it hit the $16,500 deferral limit), or worse, why they got a check back early in the following year with a letter saying, “Sorry, our plan failed the ADP test, here’s a refund for the excess amount you deferred to the plan.”

So why does the government place these limits on retirement plans? The short answer: so that the 401(k) plan doesn’t discriminate against (or favor) certain employees participating in the plan on the basis of contributions. Another factor may be tax revenue, as employees defer their salaries pre-tax, which means they are not paying income tax on the deferrals—a revenue loss for the government.

Read more…

GAO looks at conflicts of interest in retirement plan advising

May 23rd, 2011 No comments

Jeff_MarzinskyThe Government Accounting Office (GAO) recently released a study, “401(k) plans: Improved regulation could better protect participants from conflicts of interest.”  As you can guess from the title, the study examines the independence of advice provided to plan participants and plan sponsors and considers how conflicts of interest might affect the advice provided to sponsors and participants.

The study references a white paper I wrote several years ago that is worth revisiting. The paper looks at 401(k) fees and poses key questions for plan sponsors: What is being paid for record-keeping? Are you getting the best price for mutual funds? And who is paying for what?

Are 401(k)s plus annuities all that new?

May 12th, 2011 1 comment

Jeff_MarzinskyThe retirement industry is abuzz with the hot topic of adding an annuity option to a 401(k) plan with the goal of creating lifetime income for your employees. To many this is a very new concept, right?

Well, no, it isn’t. In the past many employers sponsored traditional defined benefit (DB) pension plans, which provided much the same type of benefit: a stream of lifetime income at retirement, with the flexibility of a variety of payment options. The 401(k) plan was created in the 1980s to supplement the pension plan, enabling employees to make additional pretax deferrals to these plans. So, as you can see, we’ve had this type of benefit in the past.

Fast forward to today when, by combining a traditional defined benefit pension plan with your 401(k) plan, you’ve just created a “balanced” investment program for your employees.

You might consider the pension as the fixed-income portion of a portfolio generating stable returns and the 401(k) plan as the equity portion offering the potential for growth with some volatility. Wouldn’t that make a nice balanced investment portfolio?

So, the Combined Pension/401(k) Program provides lifetime income and a balanced type of portfolio for your employees, in addition to the other enhanced features of the traditional pension plan.

Wouldn’t it make sense to pair your 401(k) plan with a defined benefit pension plan?