A Conundrum

A very interesting article appeared in The Record (Bergen) on Christmas Day. The title was Retirement Savings vs. Student Loan Payments, by Janet Kidd Stewart.

We have been discussing this topic for years. Given the financial demands on individuals, whether they be in their 20s or 60s, the ability to fund a retirement program is being compromised. Wage growth has been stagnant since the late ’90s, and the labor force participation rate keeps on falling and is currently 62.7% (11/16), with roughly 95 million age-eligible workers on the sidelines.

In addition to being burdened with incredible student loan debt, many individuals are paying a much larger share of their medical insurance premiums, while incurring rising housing and rental costs. In the wake of all this debt and expense is the need to fund a retirement program through a defined contribution plan, as the private sector is just about out of the defined benefit game.

Regrettably, funding retirement accounts hasn’t been the highest priority for most households, and according to the the National Institute on Retirement Security (NIRS), the median U.S. household has just $3,000 in retirement savings! We believe that a retirement crisis is unfolding in the U.S., and the social and economic impact will be devastating.

There are many who believe that irresponsible behavior (spending more than one earns) is leading us down this path, but we believe that our economy’s lack of quality jobs, flat wages, and exorbitant educational costs are crippling many, both young and old.  Sure, there will always be those that spend recklessly, as seen by the incredible total of auto loans and revolving credit debt that has been amassed, but we believe that it isn’t the norm.

Obviously, we’d welcome the revival of the traditional DB pension with the monthly payout until death, but we are not naive enough to expect that plans that have been shuttered will once again rise from the ashes.  However, we can do a better job to make sure that those DB plans still active today start on a new path to better funding by focusing more attention on the promise that they have made.

For those of you in a DC plan, we know and appreciate how difficult it is for the untrained (that is most of us) to manage this responsibility.  We at KCS have strategies and ideas on how to make your participation in a DC plan a more successful venture, but it all starts with funding whatever you can afford as early as possible.  Let us help!

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Asset.TV – A Resource Worth Mentioning

We are not generally in the habit of endorsing a company or product, but given our on-going concern about the U.S. retirement crisis, we feel compelled to highlight an effort being put forward by Asset.TV.  I first was introduced to this organization roughly 5 years ago, and the growth in their scope and reach has been amazing.

We often question the lack of advocacy within the investment industry for the traditional defined benefit plan.  However, Asset.TV is an organization that can be proud of their effort to elevate critical retirement-related issues, while bringing to their subscribers unique perspective and content that challenge the status quo.

According to Asset.TV, they launched a new platform called the Retirement Channel several months ago as a landing page for fine content (both video and written) that focuses on the issues concerning the macro retirement industry. Content comes from all providers in the space on Asset TV and we promote the channel with a monthly wrap up video highlighting the sponsors on our platform. The monthly update videos are promoted via a dedicated email to 230,000+ professional investors.

As a rule of thumb across the website: All Asset TV content is intended to be insightful and used for research. No product pitches or endorsements; they take a third party, unbiased approach when creating content for investors to ultimately make their own conclusions.

There are many successes within the retirement industry that should be highlighted, but regrettably there are many more failures, and the greatest of these is our failure to be able to retire a significant percentage of our population with the financial means to actually enjoy a retirement.  The social and economic ramifications of this failure will be grave.  With organizations, such as Asset.TV, hopefully our industry will be able to improve the outcomes for those who are most in need!

U.S. Rates Up – Now What For Plan Sponsors?

The U.S. Federal Reserve raised the discount rate 25 basis points as expected.  But, was it warranted? Markets have certainly been going gangbusters, but the economy has been muddling along, and it appears that fourth quarter growth is likely to be more tepid than the third quarter’s >3% results.

The recent equity market reaction to President-elect Trump’s upset victory seems out-sized based on the underlying fundamentals of corporate America. Corporate investment is still lagging, and capacity utilization was estimated at 75% in November.  That is the same level that we were at during the market  correction in 2001. Regrettably, real wage growth has been stagnate for nearly two decades further tempering demand for goods and services.

Pension America, at least those that mark liabilities to market, should be happy that U.S. long rates have risen substantially.  The 10-yeat Treasury’s yield is at 2.55% today, up 25 bps from the beginning of the year, but a whopping 1.23% from the low of 1.32% established on 7/6/16.  Asset performance in the fourth quarter should be strong and liability growth should be negative.  The combination should help plans see meaningful improvement in their funded status.

But, if equity markets are ahead of themselves from a fundamental perspective, while bonds have sold off more rapidly than the economics dictate, plan sponsors may be sitting on a potential negative scenario.  The fact that most plans have little exposure to US bonds, which are highly correlated to plan liabilities, exacerbates this situation.

We believe that DB plans should de-risk when possible, even plans that are not well-funded.  We’ve written about this on many occasions.  Our preferred implementation is through a cash-matching strategy, as opposed to a duration matched program. With Treasury bond rates up, an implementation using Treasury STRIPS is cheaper today.

Interestingly, high yield bond rates have actually continued to fall making an implementation using high yield a little more expensive.  Although, there is still a huge advantage creating a cash-matched strategy using high yield and lower quality investment grade (BBB and A) bonds, but the advantage has been narrowed.

If a cash-matching strategy is not in the cards at this time we’d recommend that you review your current asset allocation versus your policy normal levels, especially in small cap value, which had an extraordinary result in November. Capturing profits is a good thing.

 

 

Thank you!

It has been a little more than 5 1/3 years that KCS has been in operation as an asset / liability consulting firm.  As we enter the holiday season I want to take this time to thank the many conference organizers for providing the KCS team with the opportunity to share our thoughts and views with the retirement community more than 50 times during the life of the firm.

We sincerely believe that we have something to offer the pension community, especially when one considers our diverse backgrounds spanning more than 200 years of collective experience for the six of us, but really who is KCS? Well, despite our lack of name recognition and size, we have been given an amazing opportunity to get our views into the marketplace, and we can’t thank you enough!

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We don’t want to slight any organization that has provided us with an opportunity to speak, but there are several organizations that stand out in giving us the greatest opportunity to provide education and insight, including: Opal, IFEBP, IMI, FPPTA, and FRA.

We hope that those who have heard us present find that we bring a thoughtfulness to our views.  You may not always agree with our conclusions, especially since we often take a contrary view from more traditional providers of consulting services. However, they’ve been developed over many years observing what has and hasn’t worked.  Furthermore, we look forward to having our views / ideas challenged by the pension community.

As you’ve heard us say many times, our retirement industry is under great stress right now. We need to rally together to create change that will preserve defined benefit plans for the masses. It would be wonderful to think that perhaps some words of wisdom from a senior member of the KCS team has been a positive influence in that effort.

The Nearly Impossible Dream

The following article appears in the WSJ today. It speaks to an issue that we, at KCS, have been discussing for years.  Specifically, with U.S. wages staggering, the ability to fund a retirement plan through a defined contribution plan is getting more and more difficult, if not impossible.

The American Dream is fading, and may be very hard to revive
http://www.wsj.com/articles/the-american-dream-is-fading-and-may-be-very-hard-to-revive-1481218911?emailToken=JRrzdvBzZH+Qh9c3Z8wg1FBtZ6wFEe6CT1WSIGrHM02JtWeQr+utxqM6wtKxrSaqTFc/7d1B8WMlVHjRiXBmGdOW3qRyj1a6djwE8sGdi1Tbax2C

According to several researchers at universities, including Harvard, Stanford and the University of California, 92% of 30-year-olds in 1972 out-earned their parents at the same age.  Regrettably, only 51% of 30-year-olds can say the same thing today.  Wages have stagnated since the late 90’s, and adjusted for inflation, they are actually below 1999’s level.

So, we repeat, who thought that it was smart policy to shift a significant portion of our private sector from company funded defined benefit plans to defined contribution plans? Many of our 30-year-olds are burdened with excessive student loan debt because of incredible increases in tuition expense.  At the same time, the companies that they work for have dramatically reduced their support of company sponsored medical insurance, the cost of which has also far outpaced inflation.  These increasing burdens further reduce one’s ability to fund a retirement plan – so they don’t!

It shouldn’t be a shock then to read about median DC account balances that are ridiculously low, while also learning that roughly 50% of our population hasn’t saved anything for retirement.  You are kidding yourself if you don’t believe that there is a retirement crisis unfolding in this country.  There will be grave social and economic implications as a result.  It is time to rethink this failed policy choice!

Could This Happen To You?

I must admit that I’m a pretty sappy guy when it comes to movie selections, and my choices often get me abused by my sons, although my daughters don’t hold back either.  The title of this post reminds me of a movie that I have watched more than a few times, “It Could Happen To You”, which is a Nicolas Cage and Bridget Fonda movie about a winning lottery ticket, and the subsequent troubles that follow. However, in the end all is just grand.

Unfortunately, what I am about to highlight for you does not have a fairy tale outcome, and it might just be the tip of the iceberg for cities around the country.  If you haven’t heard about the pension crisis in Loyalton, CA, you should make sure to get up to speed rather quickly.

Loyalton is a city in Sierra County, CA. As of the 2010 U.S. Census the population was 769, reflecting a decline of 93 from the 862 counted in 2000.  According to Wikipedia, many of the population are ranchers, loggers, former loggers, or suburbanites escaping from the San Francisco Bay Area, Sacramento, and the growing Reno-Tahoe area.

The trouble begins in 2013 when town officials decided to withdraw from CalPERS, upon the retirement of its last guaranteed pensioner. For council members, it just made sense — after all, the town had been fully paying its required annual contributions all along. What they didn’t count on was the $1.6 million termination fee demanded by CalPERS to cover unfunded liabilities that CalPERS had allowed to grow for the last 17 years. The fee amounts to a whopping $320,000 per each of Loyalton’s five retirees, an amount that is impossible for the town to pay. And now CalPERS has put the retirees on notice that their monthly checks will be cut.

Unfortunately, this is what can happen when cities run out of money and their pension plans are underfunded. Regrettably, this is not an isolated situation, but it is likely the most dramatic to date. Furthermore, this is not exclusive to public pension plans, as we’ve seen large withdrawal penalties assessed on multi-employer plans, too.

Defined Benefit plans need to be preserved, but in order to insure that future Loyalton’s don’t continue to occur, sponsors need to change their focus from trying to achieve the ROA. It is time to take the path less traveled.