PLANSPONSOR - September 2017 - 21

TDF Fixed-Income Exposure
WHEN it comes to the fixed-income allocations
of target-date funds (TDFs), Jake
Gilliam, senior multi-asset-class portfolio
strategist with Charles Schwab & Co.,
says he has noticed that plan sponsors and
participants have acquired something of
a false sense of security. Since the financial
crisis of a decade ago, in an effort to
combat years of incredibly low interest
rates, some active fixed-income strategies
held in TDFs have taken on additional risk
within their portfolios. " As a result, some
TDF fixed-income exposures risk the
potential of behaving more like equities
than bonds, should significant market
stress return, " Gilliam suggests.
As an illustration, he discusses what
it takes today vs. a decade ago to secure
a 5% yield through fixed-income investments.
In 2007, it could be done while
taking virtually no credit risk using more
or less only U.S. Treasury securities. Two
years later, investors needed to utilize
U.S. corporate investment-grade bonds to
achieve that same coupon level, Gilliam
notes. Today, a similar 5% coupon requires
" venturing into Ba-rated U.S. high-yield
bonds, representing a significant elevation
in credit risk relative to U.S. Treasurys. "
The real concern is that greater exposure
to higher-yielding corporate bonds
can " notably dampen a fixed-income allocation's
diversification benefits to equity
investments. " Crucial for plan sponsors
to note, Gilliam says, this stretching for
yield is very common in the TDFs that are
most popular in the U.S. defined contribution
(DC) plan market. " Consider the
historically negative return correlation
of the Bloomberg Barclays Capital U.S.
Aggregate Bond Index to the Standard
& Poor's (S&P) 500 Index, which has
allowed the bond index to perform as an
effective cushion against stock market
downturns. Investment-grade and highyield
corporate credits have failed to offer
the same degree of protective attributes,
instead moving more in tandem with
stocks, " he says. " This greater correlation
to what is often the riskiest part of
retirement savings may subject them to
greater downside exposure just when they
need the most protection-when equity
markets turn volatile.
" Plan sponsors may also find it useful
to review if and how a fixed-income strategy's
risk exposure may evolve at various
points along the glide path, " he concludes.
-John Manganaro
More Sponsors Turn
To Cash Balance Plans
THE number of new cash balance plans
experienced a 17% increase, compared
with a 3% increase in new 401(k) plans,
according to research by Kravitz Inc.
There were 17,812 cash balance plans
active in 2015, the most recent year for
which complete Internal Revenue Service
(IRS) reporting data is available. This
marks more than a decade of double-digit
annual growth in the cash balance plan
market, concurrent with the decline of
traditional defined benefit (DB) plans, the
firm notes. Cash balance plans now make
up 34% of all defined benefit plans, up
from 2.9% in 2001.
In addition, Kravitz found that plan
sponsors made a record-setting $29.3
billion in contributions to cash balance
plans in 2015, with total plan assets rising
to $1.1 trillion.
While medical groups and law
firms still comprise about half of the
cash balance plan market, Kravitz found
that the plans are becoming increasingly
popular across the business world, from
the technology sector to retail to manufacturing.
This
growth is being fueled by the
small-business sector, with 92% of cash
balance plans at firms with fewer than
100 employees.
The average employer contribution to
staff retirement accounts is 6.6% of pay
in companies with both cash balance and
401(k) plans, vs. 3.7% of pay in firms with
401(k)s alone. -PS
Cash Balance Plans as a Percentage
Of All Defined Benefit Plans
28%
25%
20%
16%
14%
10%
3%
4%
5%
6%
7%
8%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Kravitz Inc., " 2017 National Cash Balance Research Report "
11%
29%
34%
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