Butch Lewis Act Bill Filed in 115th Congress

We are happy to report that the Butch Lewis Act was filed with the 115th Congress today.

A BILL to amend the Internal Revenue Code of 1986 to create a Pension Rehabilitation Trust Fund, to establish a Pension Rehabilitation Administration within the Depart- ment of the Treasury to make loans to multiemployer defined benefit plans, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled.

This Act may be cited as the ‘‘Butch Lewis Act of 2017’’.

It is critically important that we protect and preserve the promised benefits for millions of Americans. Putting into law this Bill will be a great first step in accomplishing this objective. Please reach out to your representatives to make them aware of the importance of this legislation. We need everyone’s support.

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Change Is Good – Really!

At the most recent IMI Consultants’ Congress in NYC, several panelists discussed their evaluation process of investment managers and their products for both the defined benefit and defined contribution markets. One of the prevailing areas of focus was the consistency of both the investment process and the “insights” that they are trying to capture and exploit.

There has always been this great concern emanating from the consulting community about changes to a manger’s investment process and stock selection elements. In my former life as head of Invesco’s Quantitative business, we were always being challenged by consulting firms when discussing an evolutionary change in model weights or stock selection factors.  But, why?

One of the real special aspects of the investment management industry is the abundance of very bright and intellectually curious people. Great ideas can and will be arbitraged away over time.  Either because a firm is not cognizant of their idea’s natural capacity or they refuse to adhere to it, or because other firms “stumble” on their secret sauce.

No process will remain robust if it doesn’t evolve. What consultants should be doing in their evaluation process is to challenge investment advisors to reveal their research agendas related to the ongoing evaluation of stock selection criteria.  Experience should account for something, so what do you know today relative to what you knew or didn’t years ago? Also, ask if these firms monitor the effectiveness of their insights on a regular basis. We would suggest that firms adhere to certain disciplines without truly knowing whether or not they still have predictive ability.

Passive management has been eating the lunch of active managers in recent years. There are many reasons for this, and we would suggest that active managers will once again have their day in the sun, but they don’t do themselves any favor by not challenging every aspect of their investment process on a regular basis. Finally, asset consultants who can’t embrace change will be picking yesterday’s winners!

The “Rothification” of 401(k)s

Anyone who follows KCS knows that we prefer defined benefit (DB) plans relative to defined contribution (DC) plans for a significant percentage of our workforce.   Sure, there are some workers who can handle the funding, management, and distribution of a DC plan, but it is a small minority of participants.  However, since DC plans are quickly becoming the only retirement option, we, of course, want these programs to be the very best that they can be.

Congress, as part of tax reform, considered significant changes to 401(K)s.  Although legislative changes do not seem likely at this point, there are significant debates raging as to how to make the tax reform package revenue neutral, which may force both branches of Congress to reconsider their options.

Forcing individuals to adopt a Roth option for some, if not all, of their future 401(k) contributions is not going to help alleviate the growing U.S. retirement crisis.  A wonderful report has recently been released by the Center for Retirement Research at Boston College.  The report, titled, “Dodged a Bullet? ‘Rothification’ Likely to Reduce Retirement Saving” by Alicia H. Munnell and Gal Wettstein does a terrific job of comparing and contrasting the pre- and post-tax benefits of traditional and Roth 401(k)s. In the report they speculate that “many, especially those who have lower incomes or are cash-strapped, may overreact and save much less.”

It appears that 401(k) participants favor the immediate tax savings as opposed to waiting years for the tax benefit to kick in.  According to Vanguard, nearly 70% of all of their 401(k) participants are provided with an opportunity to invest in a Roth option, yet only 9% actually use one. Furthermore, when polled, 80-90% of plan sponsors believe that eliminating or reducing pre-tax contributions would have an adverse effect on retirement savings.

As mentioned above, we are already facing a retirement crisis in this country. Let’s not exacerbate the situation by imposing more hurdles.  Let’s spend the necessary time fixing traditional 401(k)s to make them more like retirement vehicles than glorified savings accounts.

 

The Butch Lewis Act Must Be Supported

For months we’ve teased our readers with references to possible legislation to preserve and protect multi-employer defined benefit plans. Finally, the Bill named the Butch Lewis Act, is being put forth by Senator Sherrod Brown, Ohio, that will protect those promised retirement benefits. Senator Brown’s office put out a press release outlining the goals of the Bill.

As we’ve mentioned, Ryan ALM and KCS have been involved in creating an implementation that will be used to invest the proceeds from the loans provided by the U.S. Treasury through a new office called the Pension Rehabilitation Administration (PRA). The money for the loans and the cost of running the PRA would come from the sale of Treasury-issued bonds.

Unlike Pension Obligation Bonds, whose proceeds have been invested in a traditional asset allocation and subject to normal market volatility, the proceeds from the PRA must be used to secure all of the retired lives benefits earned to date.  By securing the currently retired lives, the fund has bought time to meet the remaining plan liabilities.

This process has been tested on some of the poorest funded plans, and it works! We believe that this model can be used to secure the promised benefits for state and municipal plans, too.  Please don’t hesitate to reach out to us if you’d like to learn more about the legislation or implementation.

Is Retiring In America Less Attractive?

MarketWatch recently published an article by Angela Moore, titled “Why Retiring In America Has Become Less Attractive”. I would suggest that most Americans find the idea of one day retiring to be very attractive.  I would propose an alternative title which would read, “Why Is Retiring In America Less Attainable?”

The  MarketWatch article highlights the fact that the U.S has fallen 3 places in the Natixis Global Asset Management Global Retirement Index. The index ranks 43 mainly developed countries on their ability to offer its citizens a secure retirement.  We now rank a very unimpressive 17th.

We’ve been highlighting the fact that the move away from defined benefit plans to defined contribution plans will produce profoundly negative social and economic ramifications, and they are clearly beginning to materialize.  According to the article, the U.S. took hits in income equality, health care spending and life expectancy. Despite America’s high income per capita, we have the sixth lowest score for income equality, suggesting that retirement saving is difficult for average workers.

Why should that be a surprise? We’ve been highlighting the fact since KCS’s inception (2011) that asking untrained individuals to fund, manage, and disperse a retirement benefit was an incredibly challenging task made more difficult by the fact that wage growth has been stagnant for two decades! According to the National Institute on Retirement Security,  the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households. That won’t get most people through half a year let-alone an average retirement of 20+ years.

Winning the lottery is not a sound retirement strategy, yet that may be what our future retirees will need to one day retire!

Bitcoin – What Is It? It Sure Isn’t An Asset Or Currency!

In July we dedicated the KCS Fireside Chat to Bitcoin.  I wrote it as much for my education as that of our clients, prospects, and friends. In our a July article we wrote,”If you thought that bitcoins could become a store of value, then the sharp price volatility seen in this currency may just change your opinion.” Furthermore, “The main reason for this volatility is that there is no underlying object/support to which the value of the bitcoin can be pegged.”

Well, if we thought that we were witnessing volatility in July, just take a look at what occurred during the last several days.  Bitcoins experienced a 29% decline in price which resulted in a loss of “value” of roughly $35 billion. At the same time, Bitcoin cash saw its price quadruple. How ridiculous!

Since neither Bitcoin nor Bitcoin Cash is a store of value, we are witnessing a very public game of Russian Roulette. Wolf Richter, Wolf Street, recently penned, “instead of being usable currencies, cryptos – CoinMarketCap lists nearly 1,300 of them, with many of them already worthless – are a form of online betting based on a new technology, and they’re subject to different dynamics than classic online betting, but not regulated or forbidden by governments, unlike classic online betting.”

If you feel that you need to participate in some of this action, we’d suggest that you tread very, very lightly!

KCS November 2017 Fireside Chat – All About DC Plans

We are pleased to share with you the latest edition of the KCS Fireside Chat series.  This article is all about defined contribution plans (DC), with a particular emphasis on some troubling practices.  In addition, we provide the reader with 2018 savings limits.

The tragic hurricane season may prove to be even more harmful in the future, as the government is allowing DC participants to use their precious “retirement” assets to address hurricane-related expenses.  Once again, our government is encouraging bad behavior,  while proving once more that DC plans, as they are currently structured, are nothing more than glorified savings accounts!

We need real retirement vehicles!