Asset Allocations of 401(k) Savers Changed Significantly Over Two Decades
While most 401(k) retirement plan savers continue to invest heavily in equities, the asset allocations of plan participants in their twenties at the end of 2015 differed significantly from those of plan participants in their twenties in the mid-1990s, shifting away from equity funds and company stock and toward balanced funds, a study conducted by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found.
Published on August 3, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015,” is the latest update of a 1999 joint study that analyzed 1996 data from the EBRI/ICI database. At year-end 2015, the EBRI/ICI database included statistical information on 26.1 million 401(k) plan participants in 101,625 employer-sponsored 401(k) plans with $1.9 trillion in assets. In the new study, the authors were able to make a cross-generational comparison of 401(k) investors in their twenties in 1996 and 2015 by drawing on 20 years of data analyzed in the EBRI/ICI series of annual studies on 401(k) participants’ activities.
The research showed that throughout the study period, the share of assets younger 401(k) participants invested in equities was high: plan participants in their twenties held 80% of their aggregate assets in equities at year-end 2015, or only slightly more than the 77% of assets held in equities by their 1996 counterparts. But the analysis also found that the vehicles younger savers used to invest in equities changed between 1996 and 2015: whereas savers in their twenties allocated 55% of their aggregate assets to equity funds in 1996, this share had fallen to 28% by year-end 2015. Meanwhile, the share of assets that these younger 401(k) participants allocated to company stock decreased from 17% in 1996 to 5% at year-end 2015.
The findings further indicated that compared to their 1996 counterparts, younger 401(k) participants in 2015 were much more heavily invested in balanced funds, including target-date funds. According to the analysis, participants in their twenties in 1996 allocated only 8% of their 401(k) plan assets to balanced funds (target-date funds were not reported separately in the database before 2006); whereas their counterparts in 2015 invested 54% of their assets in balanced funds, with nearly half (47%) of these assets invested in target-date funds.
The authors emphasized that trends among investors in their twenties are mirrored across all age groups in the database: among all investors, allocations to equity funds declined from 53% in 1996 to 43% in 2015, and allocations to balanced funds increased from 7% of assets in 1996 to 25% in 2015.
The analysis also showed that target-date funds have been growing in popularity among 401(k) investors of all ages, and particularly among recently hired participants. The study found that among all participants, investments in target-date funds rose from 5% of assets at year-end 2006 to 20% of assets at year-end 2016, and that nearly half of the 401(k) participants tracked in the database held these funds. In addition, the study found that recently hired participants have become especially likely to hold target-date funds, and to have allocated a large portion of their balances to these funds: the findings showed that at year-end 2015, 60% of recently hired participants held target-date funds, and that these funds accounted for more than one-third of their assets.
The results of the analysis also revealed that among all of the 401(k) participants studied, investment in company stock remained at historically low levels in 2015: less than 7% of 401(k) assets were invested in company stock at year-end 2015, roughly the same share as in 2012, 2013, and 2014; but down sharply from 1999, when 63% of participants were invested in company stock, and company stock accounted for 19% of assets. The study also found that recently hired 401(k) participants have been investing in company stock at especially low rates: at year-end 2015, around one-quarter of recently hired 401(k) plan participants in plans offering company stock held company stock, compared with around 43% of all 401(k) participants.
Employers Anticipate Substantial Increases in Health Benefit Costs in 2018
In 2018, average per-employee health benefit costs are expected to increase at the highest rate since 2011, driven in part by the high prices of prescription medications and other medical advances, according to the results of a survey of health plan sponsors conducted by human resources consultancy Mercer.
Early responses to a national survey of employer-sponsored health plans of approximately 1,500 employers (who responded by August 15, 2017) indicated that even after they make planned changes, such as raising deductibles or switching carriers, employers predict that health benefit costs per employee will rise by 4.3% on average in 2018. Researchers noted that this increase is considerably higher than the average annual increase over the past five years of around 3%; and is the highest since 2011, when costs rose 6.1%.
In addition, researchers pointed out that the projected underlying cost growth from 2017 to 2018—or the increase employers would expect if they made no changes to their medical plans—is 6.0%. The survey findings indicated, however, that 46% of employers will take steps to reduce cost growth in 2018.
Researchers also observed that employers must contend with cost increases related to medical advances, including the introduction of new medications used to treat complex conditions like cancer, multiple sclerosis, and hepatitis C. The survey found that between 2017 and 2018, spending on these specialty drugs is expected to increase around 15%, and the overall cost of prescription drugs is on track to rise more than 7%.
Moreover, researchers pointed out that many employers are concerned that they could be liable to pay the excise tax on higher-cost plans, which, after the failure of efforts to repeal and replace the Affordable Care Act, is still scheduled to go into effect in 2020. They cited research showing that 31% of large employers (500 or more employees) would be liable to pay the excise tax in 2020; and that with the tax threshold indexed to inflation and rising at about half the rate of health bene-fit costs, more employers will pass the threshold in subsequent years. According to researchers, many employers are introducing lower-cost, high-deductible health plans to minimize their exposure to the excise tax and to hold down overall health benefit costs.
Researchers also reported that employers are increasingly adopting strategies to manage medical costs without raising employee out-of-pocket spending, including providing care coordination and support for high-cost claimants. In addition, they noted that many employers are addressing quality by using incentives to direct employees to Centers of Excellence and other high-performance provider networks, and are moving away from traditional fee-for-service provider reimbursement and toward new payment models that reflect the value as well as the quantity of the services provided.
Companies Increase Their Use of Pay-For-Performance Incentives
More than 60% of large-cap companies provide at least half of CEO equity compensation through performance incentives, up from just one-third five years ago, according to a report on equity compensation trends recently published by executive compensation benchmarking firm Equilar.
The report’s findings, released on September 20, are based on an analysis of the Equilar 500, an index that comprises the largest U.S.-listed companies by revenue adjusted to approximate the industry sector mix of similar large-cap indices. The study examined the equity compensation design and granting practices of Equilar 500 companies, and tracked these data for those companies over the last five fiscal years.
The results of the analysis showed that the percentage of companies in the index that provided at least half of CEO equity compensation based on performance awards increased from 52.5% in fiscal year 2015 to 60.8% in 2016; and that the total share of Equilar 500 companies providing CEO performance awards has increased significantly over the past few years, from 69.7% of companies in 2012 to 82.1% of companies in 2016.
According to the study, the remaining portion of equity compensation was time-based, which means that awards vest at specific time periods, rather than being contingent on meeting particular performance goals to become eligible to receive allocations of stock or stock options. The research indicated that most CEOs continue to receive time-based as well as performance awards, with nearly 40% of companies in 2016 providing a majority of equity compensation in the form of time-based awards. However, the study also found that a growing share of these time-based awards are being provided as restricted stock, rather than as stock options.
Broken down by sector, the analysis showed that 90.5% of industrial goods companies, 86% of health care companies, and 84.6% of utilities provided performance awards to CEOs in 2016. The technology sector saw the largest growth in the percentage of companies offering performance awards to CEOs during the study period, increasing from 63.7% in 2012 to 82.3% in 2016.
Millennial Workers Show Signs of Being Highly Engaged
While workers of the Millennial generation are often criticized for being difficult to please, they may actually be more engaged than older generations of employees, the results of a recent analysis performed by the Hay Group division of executive search firm Korn Ferry showed.
The analysis of employee engagement surveys from 350 companies with a total of 6.8 million workers was published on September 6. The results showed that 73% of Millennials would recommend their employer to others as a good place to work, compared to 70% of the overall workforce.
The research also indicated that Millennials are more positive than older workers about their advancement opportunities, with 54% of Millennials having a favorable view of their opportunities, compared to 46% of the overall workforce. The findings further revealed that Millennials are more likely than their older counterparts to feel that their immediate managers support their development, with 71% rating the level of support they receive favorably, versus 63% of the overall workforce.
In addition, the analysis found that Millennials are more likely than older workers to report that the feedback they receive from managers helps them improve, with 67% saying they believe that good performance is adequately recognized by their employer, compared to 63% of the overall workforce. The findings also suggested that Millennials have greater faith in their organizations than older employees, with 71% expressing a favorable opinion about the extent to which their companies are responding effectively to changes in the business environment, compared to 65% of the overall workforce. Moreover, 78% of Millennials, but only 72% of the overall workforce, rated their company’s prospects for success over the next 2-3 years positively.
The results further showed that Millennials are more likely than older workers to believe their company treats people with respect, with 82% having a favorable view, compared to 79% of the overall workforce. In addition, 80% of the Millennials surveyed said they think their company values and promotes diversity, versus 77% of the overall workforce. The analysis also showed that the Millennial respondents were on par with overall averages in their ratings of their employer’s social responsibility (80% favorable) and ethics in operations (83% favorable).
However, while Millennials take a more positive view of many aspects of their workplace than their older co-workers, the analysis also showed that employees of this generation are more eager to test their capabilities and to be rewarded for their efforts. The analysis indicated that 74% of the overall workforce, but only 71% of Millennials, said they think their current job makes good use of their skills and abilities. Millennials were also slightly less likely than older workers to say they believe they are paid fairly for the work they do, with 47% saying they have a favorable assessment of their compensation level, compared to 50% of the overall workforce.
The results of the analysis also seemed to confirm the view that Millennials are more likely than other generations of workers to job-hop, as 60% of the overall workforce, but just 48% of the Millennials, said they intend to remain with their current employer for more than five years. To help explain this gap, researchers cited other research indicating that greater mobility among Millennials could simply be a factor of their young age.