River and Mercantile Solutions Expands US Footprint, Adds Two Managing Directors and Opens New York Office

River and Mercantile Solutions Expands US Footprint, Adds Two Managing Directors and Opens New York Office

BOSTON, June 18, 2018 – P-Solve (which will be rebranding to River and Mercantile Solutions on July 1) announced today the appointments of Tom Cassara and David Rosenblum as Managing Directors and members of the US Leadership Team. These hires will open an office in New York City as part of the expansion of the firm.

“The addition of Tom and Dave to our US team further solidifies River and Mercantile’s position in the marketplace as we rebrand from P-Solve and expand our leadership as an actuarial and investment solutions consulting firm,” said Ryan McGlothlin, Global Head of Strategic Relationships. “Their expertise and leadership will accelerate our growth in the retirement plan consulting space.”

Cassara was most recently a senior partner, investment consultant and business leader with Mercer where he worked since 1989. He is a graduate of Wake Forest University with a degree in Mathematics, a Fellow of the Society of Actuaries, and an Enrolled Actuary. He is also a Chartered Financial Analyst (CFA).

Rosenblum was also a senior partner, consulting actuary and business leader with Mercer where he has over 30 years of experience. He is a graduate of Colgate University with a degree in Economics, a Fellow of the Society of Actuaries, and an Enrolled Actuary.

“I am excited to be part of an innovative team focused on solving client problems at River and Mercantile,” said David. “The caliber and capabilities of this firm and its employees will allow us as an organization to provide customized consulting services to the full range of retirement plan sponsors.”

“To be a part of an organization like the River and Mercantile Group with their highly effective solutions and products is exciting. I am enthusiastic to be able to help implement effective and innovative solutions, like derivatives, for example, to solve complex retirement plan problems,” added Tom.

River and Mercantile Solutions provides investment consulting, actuarial consulting and fiduciary investment management services to institutional investors. The firm provides services to defined benefit and defined contribution retirement plans, insurance companies, insurance captives, endowments, and foundations.

Tom
Cassara

Managing Director
Bio: Click Here

David Rosenblum

Managing Director
Bio: Click Here

Retirement Update – June 2018

Retirement Update – June 2018

 Part of River and Mercantile Group PLC

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P-Solve Monthly Retirement Update

June 2018

Key Takeaways:

✔ Discount rates were relatively flat during May.

✔ Markets saw more volatility in May due to heightened political risks around North Korea, trade and Italy’s new populist government. Despite this, fundamentals remained strong and inflation remained insignificant.

✔ Funded status should have increased slightly in May due to the positive equity returns and flat discount rates.

May 2018 Summary

Flat discount rates and equity gains will result in small funded status gains for plan sponsors during May. Year-to-date plans should be ahead of where they were at the beginning of 2018 due to rising interest rates. Discount rates continue to be the driving factor in funded status changes so far in 2018.

Discount Rates & Asset Returns

Discount rates decreased slightly last month (0.06%). However rates are higher than rates at this time last year and up over 0.40% since the end of 2017.

Political risks such as global trade, North Korea and Italy’s new populist government led to volatility and a risk-off sentiment. The Dollar appreciated 2%, causing international equities to decrease, while US equities increased 2.8%. Interest rates backed off recent highs and bond investments generally increased.

What’s New at P-Solve?

P-Solve to rebrand as River and Mercantile Solutions

In an effort to more closely align all business units across the River and Mercantile Group, P-Solve has announced that, effective July 1st 2018, it will reposition its brand to River and Mercantile Solutions.

The alignment of a consistent brand reflects the increasing degree to which macro thinking across the business is used to develop the investment views and advice for all the Group’s clients.

For more information on the re-brand please feel free to contact Michael Clark at michael.clark@psolve.com.

Ask P-Solve!

Q:

I’ve read that 401(k) plan sponsors should consider “custom” Target Date Funds. What does this mean?

A:

A “custom” target date fund (TDF) is one that is blended by an investment manager or consultant to exhibit specific risk behavior and achieve specific return goals, based on plan participant characteristics. For example, a plan with an older, more risk-averse population may not want the chance of loss inherent in many “off the shelf” TDFs, such as those managed by mutual fund companies, which tend to be stock-heavy. Instead, they may want a steeper “glide path” – that is, one that reduces stock exposure at a faster rate than TDFs on average, to reduce the possibility of older participants with shorter investment timeframes incurring large losses during bear stock markets. Also, many “off the shelf” TDFs do not offer adequate inflation protection; this may be of concern to 401(k) plan sponsors with significant retiree and near-retiree populations for whom inflation is a major threat.  Ultimately, a plan sponsor should consider a custom TDF if their plan population is different from the broad averages that pre-packaged TDFs are designed for. Ideally, a plan sponsor would define an income replacement ratio objective for their plan (e.g., 50% of pre-retirement income in the form of an annuity for a typical participant age 65) and choose a TDF manager accordingly. As always, sponsors must follow a reasonably prudent process in selecting a TDF or other manager; they must monitor their choice over time; and they should document all decisions carefully.

 

Have a question for P-Solve? Please submit it to usa@psolve.com and look for a possible answer in next month’s update!

SECURITY INDICES: This presentation includes data related to the performance of various securities indices. The performance of securities indices is not subject to fees and expenses associated. Investments cannot be made directly in the indices. The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.

CONFIDENTIAL:  For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC.  Past performance cannot be relied upon to predict future results.  River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.

Some Lessons for Corporate 401(k) Plan Sponsors from the Litigation Explosion

Some Lessons for Corporate 401(k) Plan Sponsors from the Litigation Explosion

The number of lawsuits against 401(k) plan sponsors, recordkeepers, and advisors has exploded.[1] No 401(k) plan sponsor is immune: in 2016, a Minnesota body shop with 116 participants and under $10 million in assets was sued.[2]  And settlements have been large, totaling hundreds of millions of dollars by some estimates, led by mega plans such as Boeing’s and Lockheed Martin’s, each of which agreed to pay $60 million.[3]   Allegations against corporate 401(k) plan sponsors include violations of the fiduciary duties of loyalty (putting participants first) and prudence (following an informed process).

 

Claimed violations include:

  1. Using more expensive share classes than necessary (e.g., retail shares where institutional shares or CITs were available),
  2. Retaining an allegedly unsuitable manager, which underperformed relative to an alternative index fund or peer group,
  3. Failure to monitor recordkeeping fees, resulting in excessive payments; and,
  4. Offering a money market fund instead of a stable value fund.

 

Many of these complaints are a confusing mix of allegations of manager unsuitability and conflict of interest.  All claim that participants were injured financially by breach of some fiduciary duty owed, and seek to make participants whole.

 

Some complaints have led to large settlements, as noted, while others were rejected at the motion to dismiss stage of the lawsuit. Judges have mostly reaffirmed that sponsors don’t have to act with perfect foresight; don’t have to offer the cheapest possible fund; and, don’t have to offer a stable value fund.

 

Some ERISA attorneys think that these complaints are something of a fishing expedition, with no apparent pattern other than seeking big payoffs. After all, many lawsuits have been brought largely by lawyers who previously might have been impolitely characterized as “ambulance chasers.”

 

This is not to say that breaches of fiduciary duties of loyalty – putting participant interests first – and prudence – making informed decisions guided by experts according to a clear process – didn’t occur. Defendants may have neglected to monitor manager fees and performance, or record-keeper fees and services, etc. We simply don’t know.

 

For retirement plan sponsors, the moral of the story is to make all decisions according to a reasonably prudent process and with participants’ interests in mind, and to keep a record of all decisions. Taking clear meeting minutes is an important part of this process. A good outside advisor can help with this.

 

Another take away: retirement plan sponsors should have a clear rationale for manager and service provider selection; one that is well-reasoned, informed, and revisited from time to time. Additionally, while retirement plan sponsors do not have to use the least expensive possible funds or service providers, fees must be reasonable relative to services provided. This probably means occasional competitive bids for record-keeping services. Ideally, a record-keeper won’t have to be replaced but from time to time this may be necessary.

 

Regarding manager selection, using only index funds is no guarantee against getting sued. Index funds, no less than active managers, must be selected prudently: make sure any index funds you offer are priced competitively and track their benchmark closely. Also, if you choose to offer active managers, keep in mind that active management is a “zero-sum game” – because investors in aggregate are the market, one active manager can only win at the expense of another – and that the average active manager must underperform its benchmark after fees [4]. Active management is very hard: all active managers claim to have skill, but few actually do. If you are not an expert in manager selection or have not retained an expert, it may a good idea to use only prudently-selected index funds.

 

Finally, remember that ERISA is about the process you follow, not about results over which you had no control. Plan sponsors don’t have to be clairvoyant. They do have to act as a reasonably prudent expert would.

 

So, in summary, litigation has mushroomed, and smaller plan sponsors are vulnerable. Complaints have also become more refined. Plan sponsors should be on guard. The best defense is to act prudently, loyally, and document decisions.

 

P-Solve is a global retirement benefits consulting firm, with offices in London, Boston, Denver, and Chicago. Our 60 consultants provide investment, actuarial, and strategic advice to our corporate, public and Taft-Hartley clients in the US and UK. For more information about our defined contribution advisory services, please contact the author at marc.fandetti@psolve.com or (781) 373 6913.

[1] Twenty-nine complaints were filed in 2016, up from 12 in 2015 and 5 in 2014 and the most since 14 were filed in 2007. Investment News, Jerry Schlichter’s fee lawsuits have left an indelible mark on the 401(k) industry, September 23, 2018.

[2] Plansponsor, Retirement Plan Excessive Fee Suits Move Down Market, May 24, 2016. The claim was later dropped.

[3] Investment News, 10 Big Settlements in 401(k) Excessive Fee Lawsuits, July 13, 2017.

[4] This may not strictly be the case, due to changes in the market portfolio.

Retirement Update – May 2018

Retirement Update – May 2018

 Part of River and Mercantile Group PLC

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P-Solve Monthly Retirement Update

May 2018

Key Takeaways:

✔ Discount rates increased in April; the US 10 year Treasury yield touched the symbolic level of 3% for the first time in 4 years!

Market volatility continued through April with geopolitical factors like the prospect of a trade war between the US and China, tensions between the US and Russia over Syria, and the uncertainty of the Iran nuclear deal. These tensions were somewhat offset by a positive earnings season and strong fundamentals.

✔ Funded status should have increased in April due to the positive equity returns and higher rates.

April 2018 Summary

The rise in discount rates during the month will decrease liabilities for most plans.  This, combined with a flat US equity market across the month, will have the majority of plans seeing an improved funded percentage.

Discount Rates & Asset Returns

Discount rates bounced back from a small dip last month by rising 0.12% in April, putting rates in-line with rates at this time last year and up nearly 0.50% since the end of 2017.

US equities eked out a modest return of 0.4% while developed markets increased 2.3%. A perception of inflationary risks started to build and interest rates increased, causing US aggregate bonds to decrease 0.7%. Commodities were the strongest performers as oil prices increased 7% during the month.

What’s New at P-Solve?

P-Solve Speaks at the UCS Mid-Sized Retirement & Healthcare Plan Management Conference in New Orleans

P-Solve director, Michael Clark, spoke at the most recent UCS Mid-Sized Retirement conference in New Orleans on pension plan management and what P-Solve believes to be the three pillars of successful plan management; Investment Strategy, Liability Management, and Plan Administration and Governance.

If you are interested in learning more about his presentation or attending any of the upcoming UCS Mid-Sized Retirement conferences please email michael.clark@psolve.com for more information and to receive a UCS Mid-Sized Retirement & Healthcare Plan Management Conference discount code.

Ask P-Solve!

Q:

Should I be concerned by the recent volatility in equity markets and what can I do to reduce my exposure to equity markets falling further?

A:

Equity market volatility has picked up significantly since the end of January. Equity markets had been on one of the longest winning streaks, in terms of months of positive returns, in recent history. We regard this situation as a return to a more normal level of equity market volatility, which had been artificially low over 2017, rather than a sign of an imminent recession. That said, we remain cautious regarding the level of equity market volatility and further turmoil is certainly possible.

Sponsors who wish to reduce the impact of equity market falls on their pension plans essentially have three options:
– Sell equities and hold more cash or bonds
– Diversify away from equities into other return seeking asset classes
– Use equity derivatives to protect their portfolio from market falls.

Each solution has pros and cons. The right solution will be plan specific and will depend on things like the funded status, importance of maintaining expected return and how long the plan is expected to be around before termination.

Have a question for P-Solve? Please submit it to usa@psolve.com and look for a possible answer in next month’s update!

SECURITY INDICES: This presentation includes data related to the performance of various securities indices.  The performance of securities indices is not subject to fees and expenses associated.  Investments cannot be made directly in the indices.   The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.

CONFIDENTIAL:  For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC.  Past performance cannot be relied upon to predict future results.  River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.

Comparing DB and DC Returns

Comparing DB and DC Returns

Introduction

A recent study comparing Defined Contribution (DC) to Defined Benefit fund (DB) returns concluded that “DC Plans Have Come a Long Way!” [1] Citing lower costs, improved diversification – thanks primarily to Target Date Fund (TDF) prevalence and less company stock concentration – the authors state that DC plan performance in the 10 years ending December 31, 2016 trailed DB plan performance by less than one-half of a percentage point (0.46%, annually), as compared to nearly 2 percentage points (1.8%, annually) in the 10 years ending December 31, 2005.[2] Calling this narrowing gap “good news for plan participants,”[3] the authors imply that an appropriate measure of the success of the DC plans is their performance relative to DB plans. In this note, we explain that DB and DC returns are not comparable for two important structural reasons. First, DB plans have very different return objectives from DC accounts, and as such are invested differently – and this difference will grow over time as single-employer DB plans “de-risk” investments by shifting from equities to bonds as funded status targets are met. Second, DB plans are usually professionally advised and frequently utilize investment vehicles such as non-US equity and real estate, which may underperform US stocks when the latter are rising rapidly. Indeed, it is surprising that DC plan performance, in aggregate, continues to trail DB plan returns during periods of strong public stock market performance.

 

Asset Allocation

While lower costs and increasingly “automatic” diversification through TDFs have undeniably been good for 401(k) investors, the narrowing of the historically large performance gap in favor of professionally-managed DB plans over 401(k) accounts is more likely due to the bias of the latter toward public equities – mainly U.S. stocks, driven by TDF popularity – and the impressive returns of US equities relative to most asset classes since the financial crisis. Additionally, as corporations continue to “de-risk” their pension plans and aggregate DB asset allocation becomes more conservative over time (fewer stocks, more bonds), any return comparison during equity bull markets will be increasingly less favorable – and less relevant.[4] In this section we compare the 10 year return of a typical pension plan to that of a typical 401(k) account, using an end date of September 30, 2017 – the most recent for which private equity returns are available. Willis-Towers Watson reports that the average asset allocation for US pension plans at the end of 2016 was: 49% public equities (US and foreign), 22% fixed income (including riskier bonds, such as high yield debt), 27% “other” (including “alternatives” such as private equity, real estate, infrastructure, and hedge funds) and 2% cash.[5] As shown in the table below, the 10-year trailing return on a benchmark portfolio, weighted accordingly, and incorporating reasonable allocation assumptions (see note) as of September 30, 2017 was 4.9%.[6] Meanwhile, Vanguard reports that the average asset allocation for a 401(k) account at the end of the same period was 71% public equities (US, and some foreign), and 29% fixed income and principal preservation including cash).[7] Fidelity reports similar allocations.[8]The 10-year trailing return on a mix weighted according to these averages was 5.3%, also shown below.[9]

Naturally, the “Typical 401(k) Account” outperformed the “Typical Pension Fund” in the 10 years ending September 30, 2017.  This is expected because of the large amount of public equities chosen by (and for, in the case of TDF default funds) 401(k) investors.

Diversifiers

401(k) investors’ large allocation to U.S. equities afforded a performance “advantage” – a term we use reluctantly for aforementioned reasons – to DC plans, while diversifiers favored by professionally-managed DB funds generally underperformed US equities during the period. Asset classes such as international stocks, real estate (REITs), and hedge funds, which are widely used in professionally-advised DB funds, underperformed the US public equities to which 401(k) investors allocate so heavily, as shown in the table below.

Conclusion

DC plans have without question “come a long way”; lower costs and automatic features have improved diversification and results. However, to compare their performance to pension fund returns and draw conclusions about the effectiveness of the defined contribution retirement system is misguided. Single employer pension funds are invested more conservatively by design, and will become increasingly conservative as corporate funds step up “de-risking.” And all pension funds have access to “diversifiers” that 401(k) plans have been slow to adopt; diversifiers which often trail public equities in strong bull markets. Despite the significant structural advantage to DC plans during a period of mostly rising US stock prices, and notwithstanding the lagging relative returns of some diversifiers favored by pension funds, 401(k) investors still failed to match the performance of structurally-more-conservative pension funds. To us, this is the most telling result of any performance comparison.

 

For more information or questions about this post feel free to contact, Marc Fandetti, at marc.fandetti@psolve.com

[1] CEM Benchmarking Inc., DC Plans Have Come a Long Way!, February 2018.
[2] Ibid.
[3] Ibid.
[4] Deloitte, Pension Risk Transfer, 2014.
[5] Willis Towers Watson, Global Pension Assets Study 2017, 2018
[6] 24% Russell 1000 , 24% MSCI ACWI ex. US , 22% Barclays Gov/Credit Bond Index, 10% CA LLC US PE index , 10% Wilshire REIT, 10% HFRI Fund Weighted Composite.
[7] The Vanguard Group, How America Saves 2017, 2017.
[8] Fidelity Investments, Quarterly Trends Q4’17, 2018.
[9]
50% R1000, 21% MSCI ACWI ex. US, 29% Bar Gov/Credit Bond index.