Low interest rates bedevil state plan default options
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Directional signs respresenting types of traditional and alternative investments
      Setter: Alternative secondary deals drop 27.7% in 2020
      Kennedy Lewis raises $2.1 billion for latest opportunistic credit fund
      Emma Davies
      Octopus Ventures chooses co-CEO
      BEX Capital brings on head of origination
    • Amy Hsiang
      Meketa picks new public markets manager research director
      Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
      Nick Horsfall
      Redington names managing directors for investment consulting team
    • Multiemployer pension plans could soon see relief
      Yellen calls for more COVID relief, retirement access
      A healthcare worker provides care for a COVID-19 patient in the intensive care unit at the Saint Joseph hospital in Marseille, France, on Nov. 20, 2020.
      World must act to strengthen against future pandemics – report
      New York State Common challenges Tyson’s dual-share stock structure
    • Kenneth J. Munro III
      Empower names new national sales director
      Fidelity cuts target-date asset threshold for lower fees
      DCIIA looks to spark engagement with plan sponsor institute
      Ascensus, Empower acquire Truist record-keeping business
    • LaSalle Investment Management taps 2 for new ESG roles
      Sovereign credit ratings vulnerable to ESG risks — Moody’s
      JPMAM names head of investment stewardship, Asia ex-Japan
      New law requires MassPRIM to increase diversity of managers, consultants
    • Galina Churkina
      Building research earns honor from Aquila Capital
      Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      MacArthur Foundation invests in women’s safe housing fund
      Bill Harmon
      Voya offers fee break for minority-owned firms
    • Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
    • Nuveen sells holdings in sanctioned Chinese stocks
      Biden team to review Labor Department ESG rule
      Chicago Transit Authority drives search for discretionary investment consultant
      Directional signs respresenting types of traditional and alternative investments
      Setter: Alternative secondary deals drop 27.7% in 2020
    • Nuveen sells holdings in sanctioned Chinese stocks
      Northern Trust to take $55 million charge for job cuts
      Michaela Collet Jackson
      Columbia Threadneedle chooses first head of distribution for EMEA
      Signage for State Street Corp. is illuminated atop the State Street Financial Center building, which houses the company's headquarters, in Boston on Oct. 15, 2012
      State Street to cut 1,200 jobs
    • Ohio Public Employees returns 11.35% in 2020
      Wisconsin ETF picks new secretary
      State plan funding ratios jump in Q4
      CalPERS records 12.4% return in 2020
    • Kenneth J. Munro III
      Empower names new national sales director
      Michaela Collet Jackson
      Columbia Threadneedle chooses first head of distribution for EMEA
      Wisconsin ETF picks new secretary
      Amy Hsiang
      Meketa picks new public markets manager research director
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Chiang Ling Ng
      Hines hires first head of Asia-Pacific real estate investments
      Brand new apartment building on sunny day in spring with blooming trees
      Real estate returns forecast to trend lower – report
      Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Fresno County puts $150 million into 2 real estate funds
      Chicago Transit Authority drives search for discretionary investment consultant
      Finland’s Varma chooses Nordea for emerging market equities
      Texas County & District picks direct lending fund for first 2021 commitment
    • Fresno County puts $150 million into 2 real estate funds
      Chicago Transit Authority drives search for discretionary investment consultant
      Finland’s Varma chooses Nordea for emerging market equities
      Texas County & District picks direct lending fund for first 2021 commitment
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      Cartoons depict a year like no other
      view gallery
      25 photos
      2020 in editorial Cartoons
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
      Gold Outlook 2021
      Bond ETFs show maturity during Covid market mayhem
      2021 Outlook: A rousing recovery
    • Charles E.F. MIllard
      Commentary: It’s time to make 401(k) plans into real pension plans
      Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By iShares
      For institutional investors, ETFs can make meeting liquidity needs easier
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. DEFINED CONTRIBUTION
November 30, 2020 12:00 AM

Low interest rates bedevil state plan default options

Officials jump in to save money market funds from net losses

Margarida Correia
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Katie Selenski
    Photo: Ciara Cusseaux
    Katie Selenski said it was ‘challenging’ to change the structure of the CalSavers option.

    Some state-facilitated retirement plans are scrambling to address a problem that low interest rates are stirring up in the money market funds they offer as default investment options.

    With yields dipping to a level where they no longer cover the funds' fees, executives of state-run plans fear a situation they once brushed aside as unlikely: workers at risk of seeing their hard-earned savings post net negative returns in what many take to be an uber safe investment.

    To spare savers such disappointment, the nation's largest state retirement programs — OregonSaves, Illinois Secure Choice and California's CalSavers — have been working with their service providers to lower fees and in some cases change the structure of their default options to ensure that fees do not exceed fund yields.

    Illinois Secure Choice waived both the program management fee and state fee of 5 basis points for its default 90-Day Hold Fund investment option, while OregonSaves reduced the administrative fee for its Capital Preservation Fund, the default investment for workers' first $1,000 of savings.

    CalSavers, meanwhile, worked with its service providers to waive the underlying fund fee for its default Capital Preservation Fund and offset the program administrator's fee by reallocating money from the provider's marketing budget.

    "We didn't want to be defaulting people into essentially a guaranteed negative performance in a fund that we call capital preservation," said Katie Selenski, the Sacramento-based executive director of the $18 million CalSavers program, which rolled out statewide in July 2019.

    Like OregonSaves, the CalSavers program defaults savers' first $1,000 of contributions to the Capital Preservation Fund with subsequent contributions invested in an age-appropriate target-date fund. Roughly $14 million, or 71% of CalSavers' total assets, are in the Capital Preservation Fund.

    CalSavers' fix, however, is unsustainable over the long term as the program grows to scale, Ms. Selenski said. "We've been able to work with our business partner and we found a way to reallocate marketing funds to support savers in this option so that none of them have actually had losses in that fund, but it's not a sustainable approach," she said.

    Increasing costs

    Indeed, if yields remain low over the next three years, the annual cost of supporting the money market fund would grow to more than $1.5 million by 2022 and if yields were to stay at or near zero, the annual cost could exceed $4 million, according to an analysis by the program's investment consultant, Meketa Investment Group.

    CalSavers, therefore, is moving to change the structure of its default investment so that contributions are in the money market fund for just 30 days, rather than waiting for them to hit $1,000, and then swept into a target-date fund where all new contributions will be directed. The measure would greatly reduce the cost of supporting the Capital Preservation Fund even if yields fell further, according to the Meketa analysis.

    "It was the most challenging design decision our board has had to face," Ms. Selenski said.

    The measure, which was approved at a board meeting in October, will likely go into effect at the end of the first quarter of 2021, she said.

    Unlike CalSavers, neither the $77 million OregonSaves program nor the $42 million Illinois Secure Choice program are planning any immediate changes to the structure of their default options. Initial contributions in the Illinois Secure Choice program are held for 90 days in the 90-Day Hold Fund, a money market fund, and then swept into a target-date fund where all future contributions are directed. In March, Illinois Secure Choice began waiving both the state fee of 5 basis points, which covers the state's administrative costs, and the program management, or record-keeper fee, for the 90-Day Hold Fund. In April, the program waived the same fees for its Capital Preservation Fund, a stand-alone fund option offered as part of the program's investment menu.

    The state fee was waived in its entirety, while the program management fee, which ranged between 57 and 65 basis points, was waived as needed to ensure yields stayed positive, said Courtney Eccles, the Chicago-based director of the Illinois Secure Choice program.

    The waivers will remain in place as needed throughout the low-yield environment, Ms. Eccles said, adding that the program will continually assess the market and re-evaluate the waivers as necessary. "We feel like we're in a structurally good place as all of us are trying to figure out the best way to work with our savers," she said.

    OregonSaves, too, does not currently have plans to change the structure of its default capital preservation money market fund into which savers' initial $1,000 are directed. In March, its board authorized the executive director of the Oregon Treasury Savings Network to adjust fees and charges applicable to the fund to reduce the impact of reductions in interest rates.

    The program lowered fees to a point where even if rates went to zero, savers wouldn't go negative in the capital preservation fund, said David Bell, the Portland, Ore.-based deputy director of the Oregon Treasury Savings Network, which administers the OregonSaves program.

    That's not to say that OregonSaves will not change its structure in the future, Mr. Bell added. OregonSaves, which is negotiating the termination of its contract with its record keeper, Ascensus, is currently covering Ascensus' program management fees on the Capital Preservation Fund to keep savers from going negative, he said.

    Growing pains

    The challenges facing state-facilitated retirement plans are part and parcel of the growing pains that more mature state-run investment programs, such as 529 college savings plans, have been through, said Andrea Feirstein, a managing director at AKF Consulting Group in New York.

    "This is something we have seen over time. It's not a new phenomenon," she said. "It's just that it's hitting our Secure Choice plans for the first time now given the historic low-interest-rate environment."

    State administrators and program and investment managers of other state-run investment programs, including 529 plans, for example, have in many instances over the past decade waived fees on underlying investments, she said.

    The challenge with Secure Choice programs, she added, is that the fees are much higher than they are for 529 plans. Management fees in Secure Choice programs range from 60 to 75 basis points, compared with less than 30 basis points for the majority of direct sold 529 plans.

    The higher fees for Secure Choice programs are due to the fact that they are "start-up" plans that have not yet achieved the scale — and therefore the negotiating ability — of 529 plans.

    While negotiating and working with service providers to reduce and waive fees is not easy, not doing so would be unconscionable, Ms. Feirstein said. "You never want to see an investor hurt," she said. "You want to be doubly sure that you're not jeopardizing their investments."

    Related Articles
    Secure choice plans chugging along despite pandemic
    More states jumping onto secure choice bandwagon
    Colorado lawmakers pass secure choice legislation
    Recommended for You
    Empower names new national sales director
    Empower names new national sales director
    Fidelity cuts target-date asset threshold for lower fees
    Fidelity cuts target-date asset threshold for lower fees
    DCIIA looks to spark engagement with plan sponsor institute
    DCIIA looks to spark engagement with plan sponsor institute
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    2021 Outlook: A rousing recovery
    Climate change and emerging markets after Covid-19
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center