The Numbers Are In… And They Are Ugly!

According to Wilshire TUCS performance results for the 12 months ended June 30, are as follows: corporate plans had the highest median return at 1.64%, followed by Taft-Hartley health and welfare funds at 1.37%; public funds, 1.07%; Taft-Hartley DB plans, 1.04%; and foundations and endowments, -0.26%. Well, they aren’t very impressive!

Given the very different objectives of DB plans versus E&Fs, one would think that the results would have been quite different, but alas, these pools of assets use the same asset consultants, who basically have the same approach to investing no matter what type of plan.  E&Fs have an annual spending policy that should dictate much more of an absolute return orientation.  Yet, it is these funds that saw their median result at -0.26%.  Also, corporate and public DB plans have different accounting rules for their liabilities as FASB and GASB treat liabilities quite differently.  Yet, their results are nearly on top of one another.

Isn’t it time for another approach?  At KCS we’ve been highlighting our unique asset allocation for nearly 5 years. In our approach we bifurcate the assets into two buckets, which are insurance (beta) and growth (alpha) assets.  The insurance assets are a cash flow matching  strategy to meet near-term benefit payments.  The growth assets are non-fixed income assets with the objective to beat liability growth.  The plan’s funded ratio and contribution history will dictate how much goes into each bucket.

For plans that have funded ratios in the  70%-80% range, we would have allocated a substantial percentage of the assets to the insurance portfolio.  Unfortunately, most plans have seen their fixed income exposure dramatically reduced as interest rates fell, which has created an asset/liability mismatch.

If plan’s had adopted our approach, they would have done substantially better than the median results highlighted above as the Barclays Aggregate index generated a 6% return for the 12 months ending June 30th.  Plan sponsors need to focus more on their specific liabilities and not the ROA, which is injecting too much risk into the asset allocation decision.  Call us if you want greater insight into how we can help you improve your plan’s funded status.



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