Plan Sponsors Research Articles

Choosing Investment Managers

We study how plan sponsors choose investment management firms from their opportunity set when delegating $1.6 trillion in assets between 2002 and 2017. Two factors play an influential role in choice: pre-hiring returns, and pre-existing personal connections between personnel at the plan (or consultant advising the plan), and the investment management firm. Post-hiring returns for chosen firms are significantly lower than those for unchosen firms. The post-hiring returns of firms with relationships are, at best, indistinguishable from those without relationships, and often significantly worse. While relationships are conducive to asset gathering by investment managers, they do not appear to generate commensurate benefits for plan sponsors via higher gross returns or lower fees.

CARES Act: Implications for Retirement Security of American Workers

Many provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act were designed to provide relief to those American workers who do not have sufficient emergency savings to weather the current storm. These include increasing defined contribution plan loan limits to the greater of $100,000 or 100 percent of the vested account balance; suspending loan payments due on or before December 31, 2020, and deferring loan payments for up to one year; allowing distributions until December 31, 2020, of the lesser of 100 percent of the vested account balance or $100,000; and allowing repayment of coronavirus-related distributions (CRDs) over a three-year period. The question, however, is as follows: What is the cost of effectively using defined contribution plans as emergency savings vehicles in this way when it comes to the future retirement security of American workers? Using the Employee Benefit Research Institute’s (EBRI’s) Retirement Security Projection Model® (RSPM), we simulate the impact on retirement balances as a multiple of pay at age 65 for scenarios where employees take full advantage of the CARES Act flexibility to access their defined contribution plan. We generally find: • There are limited reductions in projected retirement balances as a multiple of pay at age 65 in scenarios where employees pay back CRDs within the prescribed three-year timeframe or take new loans — even when workers reduce future contributions dollar for dollar in order to repay those loans. • However, we see potentially significant reductions in retirement balances as a multiple of pay at age 65 when employees take full CRDs and fail to pay them back. This is especially true for older age cohorts. • The most catstrophic scenario is one in which workers are provided CARES-Act-like access to withdrawals time and again as various crises occur. In other words, this is a scenario in which policymakers essentially turn defined contribution plans into de facto emergency savings vehicles. In this scenario, the overall median reduction in retirement balances as a multiple of pay at age 65 is 54 percent. • Still, further analysis is warranted. In our preliminary analysis of potential actual aggregate utilization of CARES Act provisions based on employer responses to a Plan Sponsor Council of America (PSCA) survey, we find that reductions were very small. Even in the scenario in which employees fail to pay back CRDs, the aggregate impact — because of low estimated actual implementation and utilization of CARES Act provisions — is estimated to be less than one-half a percent.

An Efficient Defined Contribution Investing Approach

A plan sponsor fiduciary is required to provide participants an investment menu that is diversified. The DOL states the fiduciary “must act prudently and must diversify the plan's investments to minimize the risk of large losses. This requirement is consistent with the Uniform Prudent Investor Act which defines a diversified portfolio in which “gains in one investment will cancel out the losses in another.” The solution has been for the financial services industry to utilize Modern Portfolio Theory (MPT) to develop and make available diversified asset allocation strategies for participants to use to manage their plan assets. The all in one solution has been the target-date fund. The reality is that the one risk, large losses, that can be detrimental to the participant’s capital before and in retirement, have not been mitigated by the use of MPT. A risk that can wipe out 10-15 years of gains in 1 year. The objective of this paper is to illuminate this risk and offer a solution based on a new approach to MPT to develop diversified strategies that factor in the risk of a large loss. The solution is combined with an investment menu design that compliments the new MPT approach.

Employer and Plan Sponsor Views on Pharmacy Reimbursement.

No funding was received for the writing of this commentary. Stull is employed by Employers Health, which is an employer-founded and employer-led group-purchasing organization with a focus on managing contracts for self-funded plan sponsors with PBMs. It also hosts educational conferences and events for which it receives sponsorships from a variety of health benefit suppliers, including pharmaceutical manufacturers, insurance carriers, PBMs and others. Gupton has nothing to disclose.

Elevating the standard of care: Impact of a regimen-level prior authorization tool on provider adherence to clinical guidelines.

e19235 Background: New developments in oncology therapy continue to grow in complexity, fueling a dramatically rising cost of care. Traditional care models present opportunities to streamline plan sponsor management efforts, expedite therapy, and improve health outcomes. Studies suggest adherence to evidence-based standards results in higher quality care. Current plan sponsor management platforms match medical policy to individual drugs, not to combination therapy regimens and lack real-time access to standard treatment guidelines. 70% of precertification requests are submitted via antiquated, cumbersome methods such as paper and fax. Methods: CVS Health/Aetna developed a comprehensive oncology solution featuring an enterprise web-based clinical decision support prior authorization tool (Novologix) at the regimen level to reduce administrative burden and support quality care. Novologix regimens were updated via collaboration with the National Comprehensive Cancer Network (NCCN) evidence-based guidelines. Groups also entered a value-based payment (VBP) model to help support quality of care by promoting adherence to NCCN guidelines when clinically appropriate and tool utilization. Eligible members were Commercial, fully-insured members newly diagnosed with breast, colorectal, or lung cancer. Providers were offered dedicated, individual training sessions to provide education on the Novologix tool. NCCN-aligned regimens requested through the platform were automatically certified. Any non-NCCN aligned regimens received accelerated medical review by a board-certified medical oncologist with the option for an external peer-to-peer review upon denial. Providers received ongoing quality and cost of care reporting. Results: Primary in progress. N of precertification requests submitted via Novologix ( 28 requests as of 1/23/2020) - (will include graph displaying N of requests by month). N of regimens submitted via Novologix that were automatically certified (46% as of 1/23). Avg turnaround times for modified regimen requests requiring clinical review (TBD). Avg % adherence to NCCN guidelines (100% as of 1/23/20) Secondary: Total cost of care (preliminary/other leading indicator). Conclusions: By engaging oncology practices through an enhanced payer-provider collaboration and implementing an automated regimen-level precertification process we can facilitate higher-quality oncology care. Future studies will be needed to measure the impact of this program on total cost of care.

Use of Advisors and Retirement Plan Performance

As defined contribution (DC) plans become more popular than defined benefit (DB) plans, American workers are increasingly responsible for their retirement savings. Because retirement plan participants' portfolio allocation is constrained by the available funds in the plan, the construction of a plan's investment menu has become extremely important. No research has evaluated fund selection in retirement plans or compared plans involving an advisor with self-directed plans. To fill this research gap, this study employs cross-sectional, nationwide data that include 5,570 retirement plans with 100 or more participants in 2013, 2014 and 2015. Results show that in most cases, using advisors is not related to plan performance. Plan sponsors should require advisors to periodically evaluate the performance of plans under their management using objective measures.

Recent wave of 403(b) litigation offers insight for educational institutions and fiduciaries

Colleges and universities have seen a wave of class‐action lawsuits concerning IRS Code Section 403(b) plans. Between 2016 and 2019, a well‐known retirement‐plan litigator sued about 20 universities — including Johns Hopkins University, the Massachusetts Institute of Technology, New York University, and the University of Pennsylvania — and their fiduciaries under the Employee Retirement Income Security Act. The lawsuits share similar allegations about the acts and omissions of fiduciaries and target retirement‐plan features common among universities. For example, the lawsuits allege the universities breached their fiduciary duties by (1) imprudently managing the selection of record‐keeping vendors, resulting in excessively high fees; (2) offering too many investment options, allegedly confusing employees; (3) failing to monitor the performance of and to timely remove expensive, underperforming investments; and (4) failing to avoid conflicts of interest between plans and record‐keepers. These lawsuits highlight the importance of educating plan sponsors and their fiduciaries about their responsibilities and litigation risks.

Actuarial modelling of equilibrium condition in life and pension using integral transform

This paper aims at deriving actuarial modelling of equilibrium condition in life and pension mathematics under the framework of integral transform. The specific objective is to establish net actuarial balance representing the difference between the present values of contributions and benefit outgo of the defined benefit scheme. This is the equilibrium position such the plan sponsor cannot borrow to pay plan members at the point of retirement. Our investigation confirms that the present value of benefit outgo payable by the trustees equals the present value of total contribution of the plan sponsor so that the equilibrium point is reached under the framework of integral transform.
 Keywords: Integral transform, defined benefit, force of interest, equilibrium Fredholm, liability and Thiele

How Much More Secure Does the SECURE Act Make American Workers: Evidence From EBRI’s Retirement Security Projection Model®

How Much More Secure Does the SECURE Act Make American Workers: Evidence From EBRI’s Retirement Security Projection Model®

Tapering Recommendations for Benzodiazepines

Tapering Recommendations for Benzodiazepines

The Social Costs of Choice, Free Market Ideology and the Empirical Consequences of the 401(k) Plan Large Menu Defense

Regulatory reforms have recently improved 401(k) plan participation rates, but recent decisions by certain courts threaten to reverse that trend. These courts have substituted their free market ideology for fiduciary duties under ERISA in dismissing claims against plan sponsors on the ground that the menu offered was so large as to abrogate the sponsors’ ERISA duties. Under the “large menu defense,” courts have held that, even assuming a failure to exercise due care in selecting plan options, the employer can nonetheless claim the protection of the employee-control safe harbor under ERISA because, when the plan’s menu is sufficiently large, the plan participant is deemed to have exercised legal control over the relevant investment decision. The courts’ interpretation of the control safe harbor contradicts the plain meaning of the statute. Far worse, the courts’ free market assumption that large menus will increase participants’ wealth is empirically false. Research has shown that large 401(k) menus result in lower participation rates, overly conservative allocations, inferior investment options and other adverse effects that, collectively, cost workers billions of dollars every year.

The Pharmacy Battle for 2020.

The Medicare Part D program includes a requirement that plan sponsors provide enrollees with transparency surrounding the projected cost of the drugs covered by the plan.

Optimal Longevity Risk Transfer and Investment Strategies

Given the rising cost of maintaining defined benefit pensions, there has been a surge of activities in recent years by defined benefit plan sponsors to transfer their pension risk through strategies such as buy-ins and buy-outs. As buy-in and buy-out transaction pipelines grow, insurers actively participating in the buy-in and buy-out markets are exposed to significant longevity risk embedded in pension schemes. In this article, we investigate how to maximize a bulk annuity insurer’s value with reinsurance and/or longevity securities, subject to constraints that control longevity and investment risks as well as an overall risk. We apply duality and the martingale approach to derive an optimal longevity risk transfer strategy. Our results show that longevity risk transfer interacts with an insurer’s investment decision for value maximization. Our analysis also highlights the interdependence of different longevity risk management tools to achieve an overall risk target.

Nationwide estimates of medication therapy management delivery under the Medicare prescription drug benefit

ObjectiveTo describe the national delivery of medication therapy management (MTM) to Medicare beneficiaries in 2013 and 2014. MethodsDescriptive cross-sectional study using the 100% sample of 2013 and 2014 Part D MTM data files. We quantified descriptive statistics (counts and percentages, in addition to means and standard deviations) to summarize the delivery of these services and compare delivery between 2013 and 2014. ResultsMedicare beneficiaries eligible for MTM increased from 4,281,733 in 2013 to 4,552,547 in 2014. Among eligible beneficiaries, the number and percentage who were offered a comprehensive medication review (CMR) increased from 3,473,004 (81.1%) to 4,394,822 (96.5%), and beneficiaries receiving a CMR increased from 526,203 (12.3%) to 767,286 (16.9%). In 2014, CMRs were most frequently delivered by telephone (83.2%) and provided by either a plan sponsor (29.0%) or an MTM vendor in-house pharmacist (35.0%). In 2014, pharmacists provided 93.5% of all CMRs, and other providers (e.g., nurses and physicians) provided 6.5% of CMRs. Few patients who received a CMR received more than 1 within the same year (2.2% in 2014). Medication therapy problem (MTP) resolution among patients receiving a CMR stayed roughly the same between 2013 and 2014 (19.2% vs. 18.7%, respectively; P < 0.001). Finally, most beneficiaries (96.9% in 2014) received a targeted medication review, regardless of whether a CMR was offered or provided. ConclusionMore than 4 million Medicare beneficiaries were enrolled in Part D MTM in both 2013 and 2014. However, less than 20% of eligible beneficiaries received a CMR during those years, and rates of MTP resolution were low. Future evaluation of Part D MTM delivery should examine changes in eligibility criteria and delivery over time to inform MTM policy and changes in practice.

Target Date Funds and Portfolio Choice in 401(k) Plans

Target date funds in corporate retirement plans grew from $5B in 2000 to $734B in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Including these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.

The Victory of Hope Over Angst? Funding, Asset Allocation, and Risk-Taking in German Public Sector Pension Reform

Public employee pension systems have traditionally been of the pay-as-you-go defined benefit (DB) variety, where retiree payments are financed by taxes (contributions) levied on the working generation. The same holds for Germany, where civil servants are promised a (mostly) unfunded, noncontributory, tax-sponsored DB pension, representing substantial liabilities currently not recognized as explicit obligations to the public sector. This paper analyzes the risks and rewards of moving to a (partially) prefunded pension system for most civil servants in the German federal state of Hesse. First, we conduct an actuarial valuation of pension promises to retired and active civil servants, which we conservatively put at € 44 billion in present value, or about 150 percent of explicit state debt. Second, we project 50 years into the future and estimate the payroll-related contribution rate sufficient to fund the civil servant pension obligation. Next, using a Monte Carlo framework and a stochastic present value approach, and a Conditional Value at Risk measure, we identify an asset allocation for plan assets that minimizes worst-case pension costs. Prefunding the pension with a tax worth about 20 percent of payroll, and investing the assets 30 percent in equities and 70 percent in bonds, substantially reduces expected and minimizes worst-case pension costs. Finally, we illustrate contribution rates and asset allocation when the plan sponsor is limited to a particular risk budget. In one interesting case, current taxpayers are asked to pay additional regular contributions of only 15 percent while the portfolio is held 43 percent in equities. This mix allows future generations to benefit from possible contribution holidays and withdrawals, while providing an acceptable level of risk of supplementary contributions resulting from underfunding.

Change Is a Good Thing

Do DC plan sponsors add value by monitoring and refreshing the menu of investments offered to participants? The authors find evidence that they do, particularly by successfully removing underperforming funds. Empirical research offers little evidence that monitoring defined-contribution menus adds value, despite the time, effort, and resources spent by plan sponsors on such activities. Using a unique longitudinal dataset of plan menus from January 2010 to November 2018 that included 4,215 fund replacements, we found that the replacement fund outperformed the replaced fund over future one-year and three-year periods. The outperformance remained even after we controlled for various fund characteristics and risk factors. It can be attributed primarily to the subsequent underperformance of replaced funds and to the lower expense ratios of the replacements. Disclaimer: Two of the authors’ companies offer menu services for defined-contribution plans. Editor’s note Submitted 12 June 2019 Accepted 17 September 2019 by Stephen J. Brown

The Bond–Equity–Fund Relation Using the Fama–French–Carhart Factors: A Practical Network Approach

The main goal of this article is to show the relation between global equity and bond funds from a network perspective. The authors demonstrate the advantages of graph theory to explain the collective fund dynamics. The results show that equity and bond funds have a significant exposure to the Fama–French–Carhart factors. The authors argue that the network is dynamically driven by equity funds with their centrality scores and risk factor exposure and can transmit and amplify system-wide stress or inefficiencies in the factor bets. Using graph theory, the authors demonstrate that the return-based relationships between bond and equity funds are asymmetrical and the network is sufficiently clustered. Specifically, equity funds connect the different clusters. The HML factor is significant both on a single-fund level and as a web determinant. Therefore, investors should pay close attention to it when managing funds and deriving asset allocations. Finally, the authors provide a machine learning approach to how fund managers, plan sponsors, and analysts can derive equity–bond allocations, based on centrality scores, factor exposure, and hierarchical clustering of asymmetrically connected assets. TOPICS:Equity portfolio management, statistical methods, simulations, big data/machine learning Key Findings • The authors use topology and a concept from physics to show strong–weak return- and factor-based relationships between global equity and bond funds using a directed network approach. • The Fama–French–Carhart factors determine an asymmetrical bond–equity fund relation and different fund clusters. The network exhibits a structure that differs according to the market cycle. Equity funds play the most central role in the market and connect the different clusters. • Investors can use the bond–equity interconnectedness and network topology in multiple ways. The authors show that simple passive allocations, fund-of-funds solutions, and cluster-wise control for risk factors are some of the possible applications.

Tontines: A Practitioner's Guide to Mortality-Pooled Investments

Tontines and similar mortality-pooled investment arrangements offer a useful and unique value proposition to the global retirement challenge. A tontine is a financial arrangement in which members form an asset pool and agree to receive payouts from it while living and to forfeit their accounts upon death. Forfeited balances are then apportioned among the surviving members. So, members earn not only investment returns but also mortality credits for as long as they survive. A key feature of tontines is that they pool the longevity risk of their members. Pooling diversifies the risk and allows members the assurance of lifetime income. Because they offer no guarantees, payouts will vary depending on investment performance and the mortality experience of the membership pool. Dispensing with the cost of guarantees allows tontines to be cheaper than comparable insurance products. The study of tontine design has emerged recently as a specialty of its own. The discipline represents a paradigm shift relative to the disciplines of either traditional investments or insurance. A first step in the study of tontine design is to understand the fair tontine principle. The principle is quite strict. Yet, as a string enables a strictly bounded kite much freedom to soar, adherence to the fair tontine principle likewise enables the designer a significant (and perhaps surprising) amount of freedom. Tontines represent an alternative product choice. They might appeal to the following: - Employers that wish to offer defined benefit–like employee pension plans that can never become underfunded - Defined contribution plan sponsors that wish to offer participants an option that provides the assurance of annuity-like lifetime income while avoiding the fiduciary liability and counterparty risk associated with selecting an insurance company as guarantor - Investors who wish to increase their returns without increasing investment risk - Anyone seeking the assurance of lifetime income with greater transparency and at lower cost than with insurance guarantees - Policymakers who wish to encourage retiree participation in lifetime income solutions - Governments that wish to create (or re-create) a market for lifetime income products in countries where annuity markets are nonexistent or dysfunctional

I can see clearly now: The impact of disclosure requirements on 401(k) fees

In 2012, the US Department of Labor imposed new disclosure requirements for indirect fees that 401(k) retirement plan service providers earn through revenue sharing agreements with mutual funds. This paper examines the impact of these fee disclosure requirements on the level and structure of fees paid by retirement plans, as well as service providers’ ability to price discriminate between plan sponsors of different sophistication. We document that the new disclosure requirements are associated with a substitution of direct fees for indirect fees and a reduction in total fees paid by smaller plans, and that mutual fund providers responded by introducing retirement fund share classes with lower 12b-1 fees.