The Center of Retirement Research at Boston College has found that participation rates don’t vary for those participants who have or don’t have student loan debt. So what! Given auto-enrollment features found in many defined contribution plans the fact that participation rates differ little doesn’t surprise us at all! The only thing that should matter is whether or not a participant’s account balance (accumulated wealth) is impacted for those with student loans. In fact, it is, as the CRR found that graduates with student loan debt at age-30 have accumulated nearly 50% less in their retirement accounts ($9,300 versus $18,200).

The long-term implications of that fact are startling. Let’s assume that the participant with student loan debt can only put in 2/3rds ($2,000 versus $3,000) of the annual contribution relative to a participant that has no student loan debt.  If both groups of participants begin with the average account size at age 30 reported by the CRR and earn 5% from age 31 through to age 65, the difference in lifetime retirement earnings will be more than $141,000 favoring those without student loans.

Bottom-line: Student loan debt may not restrict participation in an employer-sponsored plan, but it certainly impacts retirement wealth creation, and that is the only thing that should matter.

Vanguard has just released their annual report – “How America Saves” – which is a review of the defined contribution plans that they administer. There are some very troubling statistics in this analysis.

The U.S. equity market, as measured by the S&P 500, has enjoyed a tremendous rally since the depths of the market correction that bottomed in March 2009 appreciating 9.1% per annum.  For the last 5 years through May 31st, the S&P 500 is up 13.0% annualized. Unfortunately, participants in the DC space don’t appear to have benefited to the same extent.

If one looks at those participants closest to retirement in the 55-64-year-old category, average balances have grown by only $22,000 ($190,000) since 2007, while median balances have actually fallen, and are currently only $71,100. Remember, Vanguard is catering to larger organizations, whose employees are likely better compensated while being provided more retirement education, yet account balances remain modest.

When looking at all workers who have a plan with Vanguard, the average balance has only grown by $11,000 since 2007, while the median balance has actually fallen by nearly $3,000 per participant. Some of the decline in the median account balance may reflect greater participation in plans as auto-enroll features ramped up. But, when factoring into the equation the millions of American workers who don’t have access to an employer-sponsored plan or those who don’t participate in their company’s plan, you can quickly see why there is a retirement crisis unfolding.

It is really silly to believe that an employee contributing 3% or 4% per annum will be able to create a retirement balance close to what they actually need to replace 60%-70% of their final income. What we are seeing is the creation of anemic account balances that need to be turned into an income stream to be used in conjunction with Social Security benefits. This combination isn’t likely to be nearly enough.

Santa Maria, CA, has a biennial “balanced” budget, but at what cost? As an elected official in Midland Park, NJ (Borough Councilman), I am keenly aware of the impact on municipal budgets from rising pension and healthcare costs. Our budget took a hit earlier this year when NJ decided to reduce the return on asset assumption from 7.625% to 7% in the last days of former Governor Christie’s last term.

In our case, the “hit” was short-lived, as Governor Murphy’s team elevated the ROA objective back to 7.5%.  However, poor Santa Maria doesn’t appear to be as lucky, as they had to allocate to their general fund millions of dollars in precious funds usually reserved for times of economic instability. Contributions to the California Public Employees Retirement System (CalPERS) have spiked by $4 million in just the last five years, and forecasts of future contributions appear to continue with this escalation.

The ramp up in expenditures is part of the reason the Santa Maria City Council faced an $8.5 million deficit in the first year of the biennial budget’s general fund. And it’s why council members ultimately opted to pull funds from the city’s Local Economic Augmentation Fund (LEAF) and additional monies from its Economic Stabilization Fund, the latter of which has never been drawn upon except in times of recession.

According to a June 27th, 2018, article that appeared in the Santa Maria Sun, the city’s Public Information Officer Mark van de Kamp explained that “LEAF, which at its peak held about $11.7 million, would give the city an extra $2.6 million this coming year and an additional $1.1 million in 2019-20. By then, he said, the reserve would be “totally exhausted.”” Then what?

In an attempt to sure up the public pension system in Mississippi the trustees for the Public Employees’ Retirement System pension board have voted to increase contribution levels for employers, including state agencies, public schools, public universities, community colleges, cities, counties and some other entities. The annual contribution rates will escalate from 15.75% to 17.4% – ouch! Employee contributions remain at 9% of pay.

The system currently has only 61% of the assets needed to meet future benefit payments, and of course, that is using a 7.75% discount rate for their liabilities, which was recently reduced from 8%.  The shortfall in assets accumulated versus promises made is roughly $17 billion using the inflated discount rate. A true mark-to-market evaluation would reveal a much more severe level of underfunding.

According to the System’s actuaries, the fund will be 100% funded in 2047, but that is assuming that future contributions are made and the ROA achieved. A further analysis indicates that a 7.25% return for that period would result in the system only having 69% of the needed assets to meet future liabilities. By keeping the ROA assumption inflated the System is consistently under contributing to the plan.

Lastly, outgoing Executive Director Pat Robertson is quoted as saying “Even though we are projected to have a good growth of 9 percent this year, there is going to be pressure to reduce the assumed rate of return.”  Given the flat performance in the markets so far this year, the 9% expectation (guess) is looking a little shakey.

Last Friday, I had the opportunity to once again speak with Asset.TV’s Sarah Makuta. The conversation took place in Central Park which was a lot of fun despite having to wear a suit in a nearly 100-degree temperature.

I’m pleased to mention that we will be doing a regular update on “all things” retirement. There are many great things happening within our industry, but much is still to be done in order to protect and preserve a retirement benefit for all. We envision speaking with key members of the retirement industry, including plan sponsors, consultants, actuaries, legislators, and investment advisors in an attempt to frame the critical issues, while looking for solutions to some of the nagging problems.

We encourage you to share with us topics that you’d like seeing covered during these segments. More to come.

The Great Financial Crisis dealt a serious blow to the funded status of most public and multi-employer pension systems as well as many private plans, too.  However, many private systems have done something about the volatility in pension funding by engaging in de-risking strategies to secure the funded ratio and stabilize contribution costs since the GFC. Isn’t it about time that the others follow suit?

We are on the record as stating that the objective for any pension plan is that plan’s specific and unique liabilities. It is not the return on asset assumption (ROA), yet most non-private systems continue to inject more and more volatility into their asset allocation decisions because they continue to believe that achieving the ROA is the only thing that matters. Given projected returns in this environment, it will be difficult to generate the results necessary to meet the 7.5% annual objective.

The good news – you don’t need to! Asset growth only needs to eclipse a plan’s liability growth in order to achieve success and improve the funded status. However, given that GASB allows for liabilities to be discounted at a flat ROA rate, plan sponsors never appreciate the fact that liability growth, when liabilities are marked to market, can be negative. In that situation, a 4% return would look quite heroic should liability growth be negative 3%. Given that that average pension system has a liability duration of roughly 12-15 years, a 50 basis point rise in rates (not extreme) would result in a -3% to -4% “growth” in liabilities.

Pension funding expenses have risen rapidly in the last couple of decades, and most states and municipalities cannot afford further stresses that would negatively impact their plan’s funding. We are seeing the negative effects of this already in states like Illinois and New Jersey, where huge budget gaps exist and spending cuts can’t make up the difference. Raising taxes in this environment, particularly in “Blue” states, is impractical given federal tax changes that will impact deductibility of state and local taxes, yet it seems to be what is being proposed. New Jersey’s government may be shut down effective 12:01 am on Sunday if Governor Murphy and the NJ Legislature can’t come to an agreement on the budget.

Don’t allow the markets to dictate success or failure. Take a new path to manage your plans and improve the odds of achieving funding success.

As many of you know, the St. Joseph’s Health Services pension fund failed. The innocent victims are once again the plan participants who were counting on that benefit to get them through their golden years.

Fortunately, action has been taken by the Governor and the Rhode Island legislature to expedite claims, which will hopefully provide a path for participants to get most of what they were expecting. According to an article in the Providence Journal, the legislation “provides that defendants entering good faith, judicially-approved settlements would not be liable for claims from co-defendants. … The finality of the settlement without fear of a contribution claim from a co-defendant provides an incentive to settle.”

KCS’s effort to support the Butch Lewis Act legislation is our attempt to mitigate the risk of insolvency for the 114 “critical and declining” multiemployer plans before they can no longer meet their promises. We certainly don’t want the millions of beneficiaries in those plans to experience the anxiety and heartache suffered by those participants in the St. Joseph’s pension system.

Time is no longer on our side, and action is needed today!

According to a recent article in Pensions and Investments, Western States Office and Professional Employees Pension Fund, Portland, OR, has filed for benefit relief for the third time.  Previous applications have been withdrawn.  The Treasury Department has 225 days to respond to this application.

According to the article, Western States has $336 million in assets and $525 million in projected liabilities. For a funded ratio of 64%. Heck, this looks to be pretty well-funded compared to many in the space. If nothing were to be done at this time, the plan is projected to become insolvent in 2036.

However, regular readers of this blog will know that proposed legislation to help Critical and Declining multiemployer plans is currently before a Joint Select Committee addressing solvency issues. We believe that it is premature for plans such as the Western States to be filing for benefit relief when there exists a real solution to this funding issue.

I have a real tough time accepting as a “solution” a benefit reduction of 30% for retirees less than 80 years old!! If you are over 80 – your benefits are protected.  In addition, current actives and terminated vested workers will also see significant reductions in their projected benefits to the tune of 30%. How many 79 year-olds do you know that could go back into the workforce and makeup that 30% reduction in wages?

Waiting for the cavalry (Butch Lewis Act legislation (BLA)) is far more appealing than jumping into a benefit reduction process, especially since the Joint Committee is tasked with coming up with legislation by September 30th that will be fast-tracked before this session ends.

In the modeling that was done to support the BLA, 111 of 114 “critical and declining” plans were able to survive with just the loan from the Treasury Department (30-year balloon payment). The three that couldn’t survive on their own got assistance from the PBGC, including some plans that are forecast to go belly up by 2027.

We would recommend that this plan and any other considering benefit reductions wait until the Fall to see what emanates from this 115th Congress.  They may just be surprised that real solutions to the funding crisis are currently being considered.

New Jersey Governor Phil Murphy is trying to convince both parties that what NJ needs is more taxes as if we aren’t taxed enough! However, to Murphy’s credit, he’s not leaving anyone out in his quest for additional revenue as his proposal includes an increase in state sales, income, and business taxes.  Good luck!

Of course, this tax increase comes at us just after the “benefits” of federal tax changes that adversely impacted any NJ resident that has more than $10,000 in combined state and local taxes, which likely includes most everybody.  Given this development, we cannot raise taxes without likely driving businesses and individuals (usually the well-heeled) from the Garden State. But, we have a massively underfunded defined benefit plan that needs to be addressed before it places an even greater burden on the social safety net that must be protected and funded, too. What to do?

We believe that New Jersey would improve its economic lot if they would direct those running the pension system to refocus their attention from trying to generate a return in excess of the 7.5% return on asset assumption (ROA) to one focused on the promise (benefits) that has been made to the plan participants. It was the focus on the ROA that lead them to move a significant chunk of assets into hedge funds at the bottom of the market in 2009, instead of buying cheap beta at a 50% discount. Not surprising at all that the results have been less than stellar.

To help close the significant funding gap NJ should look into the process that supports the Butch Lewis Act legislation that is currently under review by the Joint Select Committee on Solvency of Multiemployer plans.  Long-term interest rates haven’t risen nearly as fast as feared, and as a result, the interest rate environment is still providing opportunities to borrow at these levels. NJ would be wise to issue a pension obligation bond (POB) and then use the proceeds to cash flow match the retired lives, which would help reduce plan volatility and provide a longer investing horizon for the balance of the assets to meet future plan liabilities.

Permitting the current asset base to swing with the mood of the market is foolish when strategies exist that could help the pension system stabilize the funded status and contribution expense in a challenging funding environment. Raising taxes in this environment will likely cause much more economic harm than good. Real pension reform is the answer.

The following is courtesy of Mark Grant and the FT:

(FT) The escalating trade fight between the US and its allies sent investors scurrying for the relative safety of government debt and pushed the difference between short- and long-dated bonds to its flattest level since mid-2007.

The yield on the benchmark 10-year US Treasury was down 2.7 basis points at 2.873 percent, while that on the more policy-sensitive two-year Treasury was down 2.1 bps at 2.5287 percent. Bond prices rise as yields fall.

That pushed the difference between the two Treasuries to 34.242 bps, which is the flattest level for the so-called yield curve since late August 2007.

At a low of 33.411 basis points earlier this morning, it was the narrowest the gap had been on an intraday basis since August 31 of that year.

While not there yet, an inverted yield curve, where short-term yields trade above their long-term counterparts, is typically seen as a strong predictor of economic recession.

Couple declining long-term interest rates with a U.S. equity market that has fallen in 8 of the past 9 trading sessions (and today is ugly, too), and you have a combination of inputs that don’t support improvement in defined benefit funded ratios when marking both assets (always done) and liabilities (rarely done) to market.

Many corporate plans have already de-risked by managing their assets to the plan’s liabilities. Unfortunately, Public and Multiemployer plans have, for the most part, not engaged in this activity preferring to focus on the ROA as their plan’s primary objective.

I would much prefer (if I were a plan sponsor) to know that my near-term “promise” to my beneficiaries has been taken care of which buys time for the remaining assets to fund future liabilities. Volatility will always be a part of pension management but putting into place a de-risking strategy helps both the plan sponsor and beneficiary sleep well at night knowing that the assets are already set aside for the next benefit payment.