by Tom Cook
Vice President, CapAcuity
The current landscape for the recordkeeping and funding of non-qualified plans continues to be defined by two key trends – consolidation and market volatility.
Consolidation of Recordkeeping
For more than a decade now, a major trend within the retirement plan recordkeeping industry has been the consolidation of recordkeeping functions for both the 401(k) and the non-qualified plan with a single provider. Plan sponsors benefit from this approach by having a single point of contact for administrative issues – and plan participants benefit from being able to view their complete retirement picture through one website/login.
In order to meet this growing demand for non-qualified plan recordkeeping services, large 401(k) providers (who historically invested very little into non-qualified administration) have typically taken one of three different approaches:
- organically develop a non-qualified product offering
- acquire a non-qualified specialist firm
- outsource the back-office functions of non-qualified plan administration
Virtually every single major 401(k) recordkeeper has chosen one of these three options. A key differentiator, however, remains each firm’s ability to support an open-architecture approach to the funding/hedging and asset/liability management [ALM] of non-qualified plan liabilities using contemporary funding/hedging strategies (i.e., mutual funds, corporate-owned life insurance [COLI], exchange-traded funds [ETFs], total return swaps [TRS], tax-managed trading, etc.).
We believe CapAcuity’s unique positioning as the administrator of the funding and ALM only is the ideal response to this industry trend towards consolidation – providing the plan sponsor with the recordkeeping consolidation they demand, while maintaining access to a full range of ALM and funding/hedging strategies.
Over the past three years, since the pandemic first impacted the US stock markets, we have continued to see dramatic volatility in non-qualified plan investment performance – with quarterly performance ranging from as low as -20% to as high as +20%. Coupled with the growth in non-qualified plan liabilities over the past decade, this market volatility has led many CFOs to specifically call out the variability in operating earnings, specifically SG&A, due to non-qualified plan liabilities. This is especially true for those companies whose funding strategies flow through a different line item within their income statement.
Market volatility has also exposed certain asset/liability management practices that put companies at unnecessary risk. For instance, some plans may only rebalance their assets to match liabilities once each month. Any intra-month contributions, distributions or participant reallocations may not be reflected within the company’s assets for 2–3 weeks or more, leading to an increased risk of earnings volatility due to mismatched assets and liabilities.
At CapAcuity, we receive real-time data (daily plan liability values from a client’s plan recordkeeper, and plan asset data from plan trustees, custodians, TRS counterparties, and insurance carriers) which enables us to identify where assets and liabilities have become misaligned, and to realign plan assets as necessary. We believe this is the best solution for companies and their retirement plan advisors and administrators looking to find solutions to this earnings “noise.”