Archived Insight | December 23, 2019
Stay up to date on the latest multiemployer retirement plan developments with Currents.
The Q4 Currents covers:
It also explores selected strategies for managing multiemployer retirement plans. In this issue we cover operational risk in defined contribution (DC) plans.
In September, the Bureau of Labor Statistics released a report that includes a breakdown of the labor force by age group. One of the key takeaways from this analysis is the dramatic shift towards an increased proportion of older workers. The share of workers aged 55 and over is growing as people stay in the workforce longer. From 1998 to 2018, the share of workers ages 55 and older almost doubled from 12.4% to 23.1%, while the share of workers under age 45 decreased from 67.0% to 56.3%. This trend is projected to continue.
Capital markets have been jarred recently by plummeting global interest rates, which has led long-duration Treasury bonds to outperform core bonds in 2019. This outperformance improved the asset side of the asset/liability equation for liability driven investors. However, there are reasons to maintain a well-diversified fixed income allocation. Over the long term, a well-diversified portfolio that includes government, credit and international assets actually has been less volatile than long-duration Treasuries while offering strong risk-adjusted performance. Treasuries are an appealing safe haven for investors in times of market distress, and they remain the bedrock of a fixed income allocation. However, despite strong performance recently, most non-liability driven investors would do well to maintain a diversified fixed income portfolio and not over-react to short-term market jolts.
At a time when expected returns from public equity and fixed income are expected to be lower going forward, alternative investment strategies can offer return enhancement, a way to reduce portfolio risk or both. However, alternative strategies often introduce new market, operational and liquidity risks for plan sponsors to monitor. Therefore, they require an enhanced risk-management framework that includes documented investment policy provisions and reporting tailored to alternatives exposure. It’s important to choose alternatives managers with solid long-term track records and sound risk-management capabilities, and for investors to monitor these strategies closely.
The Pension Benefit Guaranty Corporation (PBGC) has released the premium amounts for 2020. For multiemployer plans, the per-participant rate for the flat-rate premium will increase from $29 to $30.
In September 2019, the parties to New York Times Company v. Newspaper and Mail Deliverers’ Publishers’ Pension Fund, the withdrawal liability lawsuit involving the applicability of the Segal Blend, agreed to end the litigation in the Second Circuit Court of Appeals. No details about the settlement are available. In the initial arbitration, the arbitrator rejected the Times’ challenge to the Pension Fund’s use of the Segal Blend, finding that, as there were so many decisions in favor of use of the Segal Blend, it was “settled law.” The Times sought review of the arbitrator’s decision in the U.S. District Court for the Southern District of New York. The District Court reversed the arbitrator’s decision. The Pension Fund appealed the District Court’s decision to the Second Circuit. As a result of the action to end the litigation, the New York District Court ruling remains in place. It is our understanding that, technically, the ruling is not binding on any other courts, even those in the State of New York, and no other judges are required to follow it. It is important to note that the District Court held only that the Segal Blend should not have been used in this case; it did not hold that use of the Segal Blend was, by itself, impermissible.
Traditionally, for retirement plans (both DB and DC), the discussion of risk centers on investment risk and longevity risk. For DC plans, operational risk is the risk of direct or indirect loss resulting from unanticipated events or inadequate or failed internal and external processes, people, and systems. This includes everything from transaction processing and recordkeeping to data security and consolidation of plans through mergers. DC trustees should seek to fully understand their vulnerability to operational risk. Adopting an integrated framework of policies and procedures for managing operational risk can be a helpful step.
Currents is intended for general education only and not as investment advice by Segal Marco Advisors, an SEC-registered investment advisor. Any information provided by third parties has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Non-factual statements constitute only current opinions that are subject to change without notice.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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