Working American Families are struggling in this economic environment. The lack of wealth and income growth prevents these families from buying homes in good neighborhoods with superior educational systems, becoming mobile in pursuit of new opportunities, starting a business, saving for retirement, providing their children with educational opportunities, and paying for the emergency that never occurs at an opportune time.

It is truly shocking how the median family has seen their wealth collapse since the great financial crisis (GFC).  As the chart below highlights, the median family’s wealth is 40% lower as of 2016 than it was in 2007 (using 2016’s $s). One of the primary reasons is the changing labor force dynamics where incomes are less stable as hours worked become more volatile.

The top 10% of income earners in 2016 controlled nearly 70% of all the wealth in the U.S., which is up substantially since 1989.  Furthermore, the share of families with no or negative wealth has climbed 50% (14.9% of Americans) since the GFC. This disparity is manifesting in many different ways, including stock and home ownership, where the top 10% of earners own 90% of the stock, while home ownership has fallen nationally to only about 62%, which is down from more than 68% before the last recession.

This unfortunate and unacceptable situation will likely continue to impact more and more Americans, who are being asked to fund more of their retirement and healthcare in an environment of lower wage growth and less stable incomes.

The name of the game for most plan sponsors, especially those representing public and multiemployer pension systems, is to beat the return on asset assumption (ROA).  As regular readers of this blog know, we espouse a different view that would suggest that the primary objective when managing a DB plan should be to improve the funded status while meeting the promise (liability) at the lowest cost and least risk.

For plan sponsors with more than a little experience, the decade of the ’90s was a magnificent period for return seekers. The decade of the ’00s – not so much!  However, the last 10+ years bull market in U.S. equities has made up for many sins from earlier this century, but unfortunately, plan funded status hasn’t dramatically improved and contribution expense certainly hasn’t been reigned in.

Well, if your focus continues to be on return and not cost, the next 10 years may be as ugly, if not worse, than the early 2000s provided to investors. The following is a note that I saw on the subject:

Jack Bogle, the founder of Vanguard, is a legendary name is investing. Not only did he found and grow one of the largest asset managers in the world, but he has a habit of being right when he predicts returns. Well, he has just made another prediction, and unfortunately it is not one that investors will like. He thinks returns over the next decade are going to lag their historical levels badly. His forecast is that investors can expect a 1.75% net return with a 50%/50% stock-bond portfolio over the next decade.

As I explained to a plan sponsor acquaintance this morning, the possibility of only getting a 1.75% annualized return would send most people running for the hills or worse, trying to inject more risk into their asset allocation process with the hope of driving greater returns.  But, the 1.75% decade-long return may actually look okay relative to liability growth if U.S. interest rates rise meaningfully during this period. Pension plan liability “growth” could actually be quite negative. However, in order to monitor that situation one can’t continue to only use GASB accounting (use of ROA to discount liabilities) to value their liabilities. A true mark-to-market valuation must be done.

The Center for Disease Control and Prevention has reported that the U.S. has suffered a declining life expectancy again, and it marks three consecutive years for this terrible trend. Life expectancy in the U.S. has fallen 0.3 years since 2014, which is incredible given the trend to longer lives witnessed by most developed nations.  As a point of comparison, Japan leads in life expectancy at slightly more than 84 years. The U.S. has fallen to 29th place in the world rankings.

According to the CDC&P and the WSJ, which reported on the release of this data, the main culprits are suicides and overdoses (deaths from synthetic opioids rose 45% in 2017), both impacted by the state of mind of many Americans (despair).  Incredibly, this is occurring during a supposed period of economic expansion and prosperity, but we all know that the economic benefits have not trickled down to many.   In fact, suicides have increased by more than 33% since 1999. Furthermore, the data suggest that significant differences exist based on where one lives, with rural Americans suffering to a far greater extent than those living in cities.

There is some hope expressed in the data that opioid and suicide deaths may be plateauing, but the evaluation period (first few months of 2018) is certainly not long enough to get one too excited.  Furthermore, despite advances in mental healthcare, drug treatment, improved opioid prescriptions monitoring, and the greater availability of medication to reverse opioid overdoses, root causes for this heightened despair must be addressed.

The U.S. labor force has undergone significant change with a greater emphasis being placed on as needed employment. In addition, we do have a significant percentage of our workforce that are underemployed and for those, not in the workforce, a significant mismatch exists between desired skills and current capability, with little ability to retrain many of our more mature workers. It is a dangerous combination for many of our displaced workers.

There really is no excuse that the United States with its abundant wealth and superior medical capability should have a declining life expectancy.  None!

As I’ve mentioned many times, I am a huge fan of the work being done by the folks at the Center for Retirement Research at Boston College.  Their reports and blog posts are always insightful and tremendously helpful to me in my work.  However, the most recent one has me scratching my head a bit as the title is “Boomers Find Reason To Retire Later”, and the gist of the post suggests that this is a good thing primarily because remaining in the labor force should improve one’s retirement security – work longer, have to save less.

They go on to suggest that there are many drivers, including Social Security changes, the demise of DB plans and greater reliance on defined contribution programs, the loss of post healthcare retirement benefits, etc.  I don’t know about you, but those seem to be negative developments that are forcing workers to remain in the labor force longer than they might want to.

Fine, the shift to more of a service economy, which they reference, from one heavily dependent on manufacturing does mean that one could conceivably do the work for longer, but we’ve read studies suggesting that more than 1/3 of Americans over 65 would like to remain actively engaged, but that only about 14% are still working.  In addition, they cite the fact that there are many more college graduates today than years ago and that those with college degrees tend to stay in the workforce longer.  Could it be that the tremendous growth in student loan debt is forcing this behavior, as the ability to set aside assets for retirement is postponed until much later as student loan debt is serviced?  This is particularly relevant especially for those dependent solely on retirement benefits from a DC plan?

Lastly, they highlight the effect of more women being in the labor force, and that married couples tend to retire at the roughly the same time.  Given that the “average” couple has a male partner that is 3 years older than their wife, this helps with retirement, too.  However, marriage trends have turned negative in the U.S. with only about 50% of adults married, which is down from a peak of 72.4% in 1960 and off by about 9% in the last decade.

I believe that Americans are remaining in the workforce longer (when they have control of that decision) because of significant changes that make retiring earlier almost a thing of the past. The demise of DB plans and loss of post healthcare benefits has played a significant role. Social Security changes for those born after 1959 are also impacting the decision to exit the workforce.  Furthermore, the explosion in student loans and use of 401(k)-type plans will continue to drive this trend upward.  Problem: our 62.9% labor participation rate is down substantially from 2007 and may not grow much in the future due to numerous factors including the greater impact from technology.

Regular readers of the KCS blog may recall a post that we produced on July 30, 2018, regarding cryptocurrencies. We had discovered a chart that highlighted the fact that most cryptos had failed as of that date, and we were concerned based on comments that we had heard at various industry conferences that DB plan sponsors and their consultants might be contemplating a potential investment into one or more of these instruments.  Let’s hope that they didn’t!

Earlier today, Bitcoin’s price was at $3,729 down from $6,404 one month ago and more than 80% off the high established on December 16, 2017 ($19,650) – oh, my. Based on the chart that we presented, Bitcoin was one of the few “success” stories, while more than 1,000 other cryptos had failed already.

In a challenging environment for most asset classes and products, it isn’t surprising that gimmicky investments, such as cryptos, capture the imagination.  However, as we’ve mentioned many times, the focus should be on the promise that was made to participants and use that insight to drive asset allocation and investment structure decisions. You’ll get a very different answer to the difficult question of how do I secure those liabilities.

I want to wish you and yours a Happy Thanksgiving holiday from my family and me. May the beginning of this holiday season be truly memorable!

We are blessed in so many ways, but there are many among us who are in need of assistance at this time. During this holiday season, let us all strive to do just a little more to help our family members, friends, and neighbors during their time of need.

In 1863, President Abraham Lincoln proclaimed that a day should be set aside to reflect on all our blessings. Lincoln saw reason for thanks despite trying times (the country was in the grip of the Civil War). Given the trying times that many in our country have faced this year (fires, floods, hurricanes, poverty, etc.), a day such as Thanksgiving is critically important for all of us.

The number of Seniors living within 200% of the Supplemental Poverty Measure (SPM) is staggering (currently 42%), but remember that many of those currently 65-years or older have been participating in a traditional defined benefit plan. As more of the younger Boomers and Gen-Xers begin to retire with only a defined contribution plan and/or IRA, the numbers will likely escalate.

The. U.S. Census Bureau reports two different measures of poverty: the official poverty measure (2017 $11,756) and the Supplemental Poverty Measure (SPM), which produces various thresholds based on one’s geographic area and homeownership status, and also an individual’s financial resources and liabilities, including taxes, the value of in-kind benefits (e.g., food stamps), and out-of-pocket medical spending. Based on the analysis, there are more than 21 million older adults with incomes less than 200% of the SPM.

Given the market action in US equities generally and technology-related securities specifically, I suspect that many investors are quite concerned that a “major” bear market may be evolving, especially given the duration of the current equity bull market.  US equities (S&P 500) have just today retested the previous lows established on October 29th.

But, what has changed? The macro environment hasn’t deteriorated in the past month, and may actually be improving. Just last week, Federal Reserve Vice Chair Clarida said the Fed was “close” to neutral, and they would need to be data dependent on further rate increases.  That’s a significant shift from the more Hawkish tone that we’ve been hearing from other Federal Reserve members.

Furthermore, and most importantly, the economy continues to be provided with significant stimulus. I’ve highlighted the work from my former Invesco colleague, Charles DuBois, who has a very unique view of macro economics.  He has shared the following with me:

The Center For Retirement Research at Boston College continues to do an excellent job of elevating concerns about the current state of the “average” American worker and their ability to survive, if not thrive, in retirement.  In their most recent brief, titled “How Much Income Do Retirees Actually Have?” they set out to determine what percentage of Americans will fall short of the goal to have 75% of pre-retirement income available on a yearly basis. The paper looks at 4 different measures of pre-retirement income, including final-year average, last 5-years, CPI career-average, and AWI career-average (AWI is average-wage-index career average earnings).

Whatever measure is used to determine financial solvency (preparedness), we are struggling as a nation, as each of these measures indicate that at least 42% (final-year average) of our population will fall short of their income target in retirement, with three of these measures indicating that from 52% to 60% of workers will not save enough. Wow!

Importantly, this report also set out to determine if the data sources truly capture the current state of affairs or are they underestimating how much has been set aside. Through their analysis, they are comfortable that 4 of the 5 primary sources of retirement income are doing a very good job, which is unfortunate since the data support the notion that there is a retirement crisis unfolding. The only source that falls short is the Current Population Survey, which has been reported previously.