DB, DC Plans Changing Investing Composition
As the financial crisis continues, employers are beginning to take action with regards to both their pension and 401(k) plans, according to the International Foundation of Employee Benefit Plans.
"Six months ago, many retirement plan sponsors reported that they were 'taking the long view' of the situation," said Sally Natchek, senior director of research at the foundation. "Now, employers seem to view the crisis as more severe. There's been a jump in the number making changes to their offerings, categories of employees covered, asset allocations and employer matches."
Among DB plans, 42% have changed their asset allocation, up from 20% that had done so six months ago in October. Most commonly, they are increasing their allocation to fixed income assets (37% are doing so), followed by reducing U.S. equity allocations (17%) and investing in alternative securities (13%). Further, 17% of DB plans have discontinued offering pension benefits to all or some employees, and 21% have closed their plan to new participants.
Among DC plans, changes are not as common, but they are being made. Thirteen percent have changed their investment product offerings, up from 7% that had done so as of October. In this group, 21% have added lower-risk investment choices, 18% have increased diversification, 16% have added target-date funds, and 15% are now offering government-backed options. Further, 16% of DC plans have reduced or eliminated employer matches as a result of the economic situation. Of this group, 52% have eliminated the match altogether.
"Although the number of plan sponsors that have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution," Natchek said.
Forty-four percent of DC plan sponsors have noticed employees decreasing their contributions, up from 28% who did so in October.
"It's important for employees to keep contributing to their 401(k) accounts to ensure a secure retirement," Natchek said. "However, if the crisis continues, we're likely to see these numbers increase even higher. This could have a potentially devastating impact on the retirement future of many Americans."
Feds Consider Consumer Financial Protection Panel
The Obama administration is considering forming a regulatory commission to protect consumers against predatory sales and practices by mutual funds, mortgage lenders and credit card companies.
Along with creating a systemic risk regulator, the consumer protection commission would be one of the administration's biggest steps in its commitment to overhaul financial regulation. Already, according to reports, the administration is talking with industry leaders, lawmakers and consumer and investor groups about the idea.
Industry groups are likely to argue against additional regulations, and existing regulators, such as the Securities and Exchange Commission, are expected to resist any encroachment on their powers
Top Stock Pickers Disagree On Banking Rebound
A line has been drawn in the sand, and anyone with an interest in banking stocks will have to pick a side.
On the one side is Bill Miller, chief investment officer of Legg Mason, who is famous for beating the Standard & Poor's 500 Index for 15 consecutive years until 2006. Miller considers financials to be on sale and has been waiting and hoping they will rebound.
On the other side is Meredith Whitney, a former Oppenheimer & Co. stock analyst who called banks "grossly overvalued" in 2007 and accurately predicted a much more extreme recession than most of her peers. Whitney has become a celebrity in the investment community for her bearishness, and recently left Oppenheimer to start her own firm.
Miller has been loyal to financial stocks even as they continued to slide, and has been betting everything that they will recover quickly. In April 2008, he mistakenly called the bottom in financials, and his unwavering faith in Bear Stearns, Freddie Mac and American International Group have caused him to lose more money since 2006 than 99% of his peers, according to Morningstar.
"Financials have the biggest potential to outperform," Miller said recently.
Whitney thinks banks will return to negative earnings after they post their first-quarter profits because their gains don't mirror improvements in their businesses. "The underlying core earnings power of these banks is negligible," Whitney said.
Investors are torn over who to believe. Just about everybody wants banks to recover, but most aren't as confident as Miller that a recovery will come soon.
"It could be Bill is right and the vast majority of banks will earn their way out of this," William Stone, chief investment strategist at PNC Financial Services Group's wealth management unit, told Bloomberg News. "But if the economy takes another nosedive and the adverse feedback loop begins again with a vengeance, then maybe it's Meredith."
"[Miller] made massive bets in institutions that were wiped off the face of the exchange," said Frederic Dickson, chief market strategist at D.A. Davidson & Co. "I'm pretty much in Meredith Whitney's camp on this one. She's been dead-on in identifying the problems in the banks. I'm hoping for the economy's sake and banking's sake that I'm wrong."
Retirement Market at $24T
The U.S. retirement market has over $24 trillion of assets and generates $183 billion of annual revenue for financial services firms, according to Novarica. Despite the retirement market's size, "few have a clear picture of the total value chain and who captures most of the revenues," Novarica said. Distribution, not manufacturing, is capturing the lion's share of the revenue in the U.S. retirement market, according to the firm.
70% of Money Managers See Economy Improving
Seven out of 10 money managers surveyed believe the world economy will improve within the next 12 months, and already, they are putting their money back to work in the stock market, principally due to their bullish outlook on corporate profits, according to the Merrill Lynch survey of fund managers for May.
Average cash holdings have fallen to 4.3%, down from 4.9% in April. Although equities are still underweight in most fund managers' portfolios, they are edging back into them, especially cyclical sectors that are expected to perform best in a recovery. And, for the first time since August, professional investors are net underweight in bonds.
Among equities, the most popular sector is emerging markets, with China leading the way.
"Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets," said Michael Harnett, co-head of international investment strategy at Bank of America Securities-Merrill Lynch. "However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40% of fund managers are looking to overweight the region in the next 12 months.
Fund Sales Accelerate To Fee-for-Advice
Market turmoil has spurred investors' appetite for advice, and nowhere can this be seen more clearly than in mutual funds sold through brokerages or financial planners, according to Strategic Insight.
Sales of long-term mutual funds through brokers and financial advisers have moved sharply away from commission-based services to a fee-for-advice wrap model, particularly in the tumultuous fourth quarter.
For all of 2008, 27% of all sales through intermediaries were in fund wrap or fee-based advisory programs, up from 24% in 2007. And in the fourth quarter, sales through intermediaries surged to 30%.
In addition, Strategic Insight found, sales of mutual fund class A, or other no-load share classes, which are favored by fee-based advisers, accounted for 62% of new fund sales via intermediaries in 2008, up from 56% in 2007.
"Advice in the mutual fund business is increasingly provided through fee-based accounts," said Strategic Insight Research Analyst Dennis Bowden. "The market turbulence of the past year has only increased mutual fund shareholders' need for more structured financial advice."
Loren Fox, senior research analyst at Strategic Insight, added: "The financial services industry continues to move toward a culture of ëadvice and relationships,' often packaged with an assembled portfolio of investments. And the retirement of Baby Boomers, who will need more customized counseling on income-in-retirement, will only accelerate these trends."
Too Many Investors Retiring With Heavy Debt
The financial downturn has prompted Americans to make some improvements where their finances are concerned, namely to reduce spending and increase savings, but when it comes to revolving debt outside of their mortgages, they are doing little to improve their situations.
And their focus on the present might also cause other long-term goals such as saving for retirement to suffer.
Those were some of the key findings of the 2009 Survey of Financial Values and Debt, sponsored by Securian Financial Group.
Eighty-two percent are carrying debt outside of their mortgages, and one-fifth of them have debt of $50,000 or more. Yet at the same time, there is a disconnect between what they are doing and what they are worried about, for 75% are concerned about the heavy amount of debt they might carry into retirement.
"Consumers are clutching cash and postponing debt reduction," said Kerry Geurkink, director of individual annuity marketing at Securian. "They are wisely adjusting their spending and borrowing, but the ultimate goal of debt-free retirement will be more difficult to achieve without a better balance between saving and debt reduction.
"It is encouraging that Americans are willing to shun new debt and adopt more cautious attitudes toward spending," Geurkink continued. "But consumers need effective debt-reduction strategies to set themselves up for debt-free retirement."
More Funds-of-Funds Taking Defensive Plays
More actively managed funds-of-funds and mutual fund wrap programs are investing in such safe, low-cost vehicles as index funds and exchange-traded funds, The Globe and Mail reports.
Manulife Mutual Funds recently launched three index funds that it will include in its Simplicity asset allocation program, the Manulife Canadian Equity Index, the Manulife U.S. Equity Index and the Manulife International Equity Index funds.
"We have value and growth [equity styles] because they perform differently at different times," said Jeff Ray, assistant vice president of mutual fund products at Manulife. "We felt that adding a passive or index fund would be a good complement to those active styles."
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