Treasury & Risk - December 2010/January 2011

RISK MANAGEMENT
Insurance
Market
Still Soft

Commercial premiums have been declining for six years, and given that the U.S. economy is still sluggish and the insurance industry still has abundant capital, rates are expected to remain under pressure this year.

“Buyers are going to continue to benefit from a very competitive marketplace,” says David Bradford, executive vice president and editor-in-chief at Advisen, which provides data and analytics for the insurance industry.

The economy’s downturn ate away at the demand for commercial coverage, as companies went out of business or scaled back. At the same time, the stock market’s rebound and the absence of big catastrophe losses over the last couple of years bolstered insurers’ capital, leaving the industry with ample capacity.

Current low interest rates have bolstered the value of older, higher-yielding bonds in insurers’ portfolios, providing another boost to capital, Bradford says. But he notes that the bonds insurance companies are buying these days carry lower yields, which will cut their income in the future.

One possible threat to subdued insurance premiums: a major catastrophe that causes losses that wipe out a significant amount of insurers’ capacity, prompting higher premiums.

RETIREMENT
Redesigning 401(k) Match
Can Spur Workers to Save

Companies can encourage employees to save more in 401(k) plans by spreading the company match over a bigger portion of employees’ contributions, according to a recent analysis by Principal Financial Group.

Principal’s examination of its contracts for 6,560 defined-con-tribution plans found that when companies match 100% of the first 2% of pay saved, employees on average contribute 5.3% of their pay. Companies that match

50% of up to 4% of pay saw
an average contribution rate of
5.6%, while those matching 25%
of up to 8% of pay had an aver-
age contribution of 7% of pay.

“The employer match is a
great motivator in spurring better
retirement savings behavior,”
says Barrie Christman, vice presi-
dent of individual investor ser-
vices at Principal. “By stretching
the match formula, the savings
rate improves at no additional
cost to the plan sponsor.”
However, companies’ current
practices run counter to the
Principal’s recommendation.

Aon Hewitt’s data show just

11% of companies provide a match on more than 6% of pay, says Rob Reiskytl, a principal in Aon Hewitt’s retirement consulting practice.

Traditionally, the most popular match was 50% of up to 6% of pay, Reiskytl says. As the number of defined-benefit pension plans declined, many companies moved to bolster their 401(k) match, and while the most common is still 50% on 6%, 100% on

6% is now a close second, fol-
lowed by 100% on 4% and 100%
on 5%, Reiskytl says.

The fact that most companies
don’t match on contributions
exceeding 6% of pay in part
reflects inertia, he says, as well
as government safe harbor
regulations, which say 401(k)
plans can avoid nondiscrimina-
tion testing to ensure the plan
doesn’t favor highly paid
employees by following certain
guidelines, one of which is that
the company match should ap-
ply to no more than 6% of pay.
“The migration toward 6% and
not above 6% is being influ-
enced by government regula-
tion,” Reiskytl says.

In fact, he says, 401(k) plan participants should be saving a far higher portion of their salaries than 6%. An Aon Hewitt analysis of 2 million workers that took into account their access to other sources of retirement income, such as Social Security and pension plans, found that to ensure a comfortable retirement, on average, employees should be saving roughly 13% to 14% of their pay.