As the chart above highlights, savings among American households is not great, especially for those lower wage Americans who we highlighted yesterday in our post regarding 50% of Americans not being able to meet basic needs. We speculated that if food and housing are a stretch for them then you can basically forget about seeing them save for retirement. Well, this picture certainly highlights their plight.

Modest wage growth, rising costs for housing, education, medical, insurance, and food, and loss of a traditional DB plan (for most of the private sector) and you have a formula for failure. We often talk about the social and economic implications of our failure to provide a decent retirement plan. How is the bottom 50% ever going to transition from the workforce with dignity?

P&I is reporting on information recently released by Moody’s regarding the funded status for the 50 U.S. states as of fiscal year 2017.  According to Moody’s analysis, the adjusted net pension liabilities grew substantially from 2016 and now stands at $1.6 trillion up from $1.3 trillion in 2016. This analysis was done following a difficult performance year in 2016 in which the state plans produced an average 0.54% return.

The analysis is clearly dated, and the net pension liability will have likely decreased if performance is the only factor influencing this calculation, as fiscal years 2017 (12.4%) and 2018 (8.2%) have been much better for these public plans.

However, the article doesn’t mention what discount rate is used to determine the liability. I suspect that each plan’s return on asset assumption (ROA) is being used, which masks the true value of the liability. Furthermore, as long interest rates have been rising, the actual improvement in the net pension liability may be greater than what is presently being forecast.

Clearly, state plans such as Illinois, New Jersey, Kentucky, Connecticut, and others have funding issues, but if a true mark-to-market analysis were done on the state plans we might finally begin to understand the true cost. Furthermore, with the use of an appropriate discount rate, changes in interest rates would be captured in the calculation for total liabilities. In a rising interest rate environment, liability growth will likely be negative. It doesn’t take an outsized return in such an environment to meaningfully improve plan funding.

The lack of true transparency regarding plan liabilities is impacting critical decisions regarding investment structure, asset allocation, contribution rates, and benefit conversations.

The Urban Institute is reporting the results of their latest survey that highlights the fact that a significant percentage of American households can’t afford their basic needs – food and housing. This information is released at the same time that US stock owners are celebrating the longest “bull market” in history. How is this possible? First, eighty-four percent of U.S. stock is owned by just 10% of the American population. Second, Corporate America has propped up their stock prices through share buybacks and growing dividends, while investing far less in plant, equipment, inventory, jobs, and wages.

Furthermore, real wage growth has been muted for decades, while the return on capital has grown substantially rewarding those that own the companies but shortchanging the American worker, who is now struggling to meet their basic needs. This is clearly an unsustainable development.

In a recent blog post, we highlighted the fact that buying one’s starter home is becoming much more difficult, as the percentage of one’s income needed to fund a house purchase continues to escalate, and in some markets to outrageous levels (see NYC and San Francisco). Given the lack of disposable income for many Americans, is it truly realistic to have them fund and manage a self-directed retirement program?

Bloomberg is quoting the National Association of Realtors in declaring that starter-home affordability is declining, as the share of one’s income to purchase a first home has climbed to more than 23% (from about 14% in 2012). Housing prices are outpacing wage growth at this time. The increase in mortgage rates earlier this year has not helped either.

This issue is particularly acute in “hot” markets, such as New York and San Francisco, where it takes nearly 65% of one’s income to afford a house. Bubble anyone? It wasn’t much better in either Los Angeles (59%) or Miami (55%).

Couple the rising housing costs with the growing burden of student loan debt, and one can quickly see why funding for self-directed retirement accounts remains sketchy, at best. We have seen participation rates grow, but the average contribution remains well below levels needed to adequately fund one’s retirement.

Seven years ago I set up KCS with the mission to preserve and protect defined benefit plans, despite the rapid unwinding of their use in the private sector. During most of the last 7 years, I have struggled to attract opportunities that would provide KCS and my team members the opportunity to pursue this mission. We knew that there were going to be profoundly negative social and economic implications from our failure to preserve these critically important benefits (promises). But, I don’t think that we truly understood the magnitude. That is until we had the opportunity to assist the team responsible for crafting the Butch Lewis Act legislation. It has been incredibly eye-opening!

Once we got involved in that effort, it became crystal clear why we undertook this task. We tried to educate as many people as we could on the benefits of the Butch Lewis Act and the use of cash flow matching strategies to extend the life of these critically important plans that are on life support (114 plans designated as “critical and declining”).  Our effort to provide our insights has lead to us speaking with and exchanging ideas with many wonderful folks around the country. Many of whom will be negatively impacted by our government’s failure to tackle this pension crisis now! One such story that was shared with us concerns Carol. The following words are Carol’s and the depth of her despair should awaken everyone out of their lethargy regarding this issue.

“CAROL PODESTA SMALLEN’s STORY”…

“I was offered an early retirement in 2001 from Teamsters local 805 while working for Panasonic. The offer was “25 and out”, I had 26 years in so my papers state that I will collect $2,600.00 a month “for life”.

I received a letter from the Teamsters in March stating their intention to cut my pension from $2,600.00 a month to $1,022.00 a month….that’s 61%. It is supposed to happen in January 2019. If they get away with this, I will lose my house. I am a 64-year old widow who can hardly afford to pay my mortgage without the cut. In fact, my pension had everything to do with my decision to buy…it pays my mortgage which is $2,300.00 a month. Anyone between 70 and 79 will have minor cuts, they are not touching anyone 80 yrs old and up, nor are they touching anyone on disability or their beneficiaries.

* I feel paralyzed. I don’t know what is going to happen to me. I have nowhere to go.

In 2015 when I had to leave my job as a para for children with autism, I didn’t worry, because I had my wonderful pension. to see me through.

*I have been under doctor’s care for the past 18 years for depression and anxiety, and I was doing fine until 2 years ago. I was forced to give up my prescription plan because I could no longer afford it, so I weaned myself off. I have since had my prescription plan renewed. I pay $1,400.00 a month for medical and $2,300.00 for the mortgage, not including any other house bills. I take in $2,600.00 Teamster’s pension, $387.00 from a small school pension and $1,600.00 death benefit/husband’s SS.

*After paying just those 2 essential bills, I’m left with $887.00 a month to pay PSE&G, Cable, car payment, car insurance, sewer, water, food, medical copay’s, etc. This is all before they decided to strip me of my “for life” pension.

* Whenever I think of it I feel like I can’t breathe.

I wrote a letter to the secretary of the treasury because the teamster’s letter states their application for the cuts is in the Treasurer’s office. But I never mailed it, because of fear that he would ignore it. I was totally alone in this until one night out of desperation, I just googled ‘HELP…the teamsters are cutting my pension and as a result, I will lose my home!’ and hit enter. A website popped up which gave me the opportunity to tell my story. I did, and the next day I was contacted by the Pension Rights Center.

*Bottom line, I am being forced to get out of my house, only I don’t have anywhere to go.

*I have no immediate family and the only savings I have is my small retirement (401 k) I earned while working at Panasonic…

*It isn’t enough to live on by itself, but I knew I would always have my pension to help me stay above water.

*I am so scared of ending up in a shelter. I am not good at legal issues.

*Every time I think of it, I shudder inside…I don’t know what to do.

On advice from Karen Ferguson of the Pension Rights Center, I watched the hearing this morning. It gave me a shadow of hope that I may not be living out on the streets and for that I am grateful.

*Since I got that letter from Local 805 back in March, my health is slipping away.

*I don’t really care about much…I have put on 11 pounds from stress eating, and my doctor put me on Lexapro for depression and anxiety.

*I have become a shell of a person who lives in fear, not knowing if I will have a bed to sleep in after January.

Thank you for giving me the opportunity to tell you my story. Sincerely, Carol Podesta-Smallen
________________________

As a follow-up to our blog post from August 15th, titled, “But, Is It Good For The Plan Sponsor?”, we went back to do a little research on just how much consolidation there has been among consulting firms since 2006. P&I ranked the top 20 Asset Consultants by world-wide Institutional, tax-exempt assets under advisement as of June 30, 2006.  From that list, we identified nine firms that have been acquired or seen ownership change. These include Russell and Watson Wyatt, which were #1 and #2 in P&I’s ranking at that time. That is incredible change. If you extend the analysis to the top 25 consultants ranked by AUA, you have two more that were impacted.

Leading consulting firms impacted by this consolidation trend included firms such as Ennis Knupp and Associates, Hewitt, Rogers Casey, EAI (my former firm), SIS, Richards & Tierney, and the recently announced Summit Strategies, in addition to Russell and Watson Wyatt. These leading consulting firms had their own cultures and unique insights. Many of them had strong research capability. The fact that these firms have been combined with others truly shrinks the independent thinking that we need in our retirement industry.

Seeking to find economies of scale or capturing liquidity to reward one’s lifetime of work may be good for the consulting firms, but is it truly good for their clients and our industry? Who will be next? Will the movement away from defined benefit plans and the move to OCIO models force additional consolidation? We suspect that it is highly likely.

There are few barriers to entry in the consulting business, which is positive, but most plan sponsors are limiting their selection of an asset consultant to the biggest firms, and not those with the best ideas, which we’ve seen played out among traditional investment managers and hedge funds, with mixed success.

It is being reported (PlanSponsor.com) that plan administrator, Retirement Services, miscalculated benefit payments for members of IFPTE Local 21, from the Bay Area of California, that may total $1.5 million. The miscalculation was discovered – get this – in 2011, but according to the article beneficiaries continued to receive the over-payments and they were not informed that their benefit may be overstated until April 2018!

Now, the San Jose Retirement Board is considering their options, including the possibility that retired employees and/or their surviving beneficiary will have to repay the excess benefits plus annual interest.  Are they kidding? Who was asleep at the switch for the last 7 years?

Not surprisingly, IFPTE Local 21 is not happy about the prospect of having to repay this excees benefits and as a result, they have joined forces with AFSCME Local 101 to protest this possibility. Let’s hope that they are successful.

For those of you who have a lot riding on the passage of legislation to preserve and protect multiemployer pension plans, especially those plans deemed to be in “critical and declining” status, whispers out of Washington DC should be alarming.  It appears that the Butch Lewis Act legislation will undergo “significant” change before a final bill is formed. Regrettably, I’ve been told that benefit cuts are on the table as part of the negotiation. This is incredibly unfortunate and truly UNNECESSARY!

Anyone who has read a previous KCS blog post knows that the actuarial team from Cheiron did yeoman’s work to test and retest the solvency of C&D plans that receive loans from the US Treasury through the potential formation of the Pension Rehabilitation Administration (PRA). Of the 114 plans reviewed, all but 3 were able to maintain solvency while meeting existing promises and at a projected return on asset assumption of only 6.5%, which is much lower than most plans are forecasting today. The three plans that need PBGC assistance need only about 1/3 of the amount needed to protect and preserve these C&D plans should they be allowed to fail.

So we ask: why the benefit cuts? Doesn’t the Joint Select Committee understand and appreciate that the benefit payments to these retirees stimulate economic growth primarily in the local economies where they reside? The cumulative economic impact from all of these retirees is substantial. Furthermore, the average benefit payments to these individuals are very modest, and should these plans fail, PBGC support will provide benefits which equate to only pennies on the dollar for the recipients.

There has been a tremendous grassroots effort to protect and preserve these pension systems and their promised benefits, but more absolutely needs to be done at this stage. There is no need to punish the retirees because of the failure of the system to protect and preserve these pension plans. The US government enjoys the benefits of having a fiat currency to use as it sees fit. There is no excuse to get penny wise, but pound foolish at this time.

One last thought. The US Federal Reserve’s balance sheet earns more money from interest in one year than it would take to fund all of these critical and declining plans with LOANS (not bailouts). Let’s dedicate 2019’s interest to finally solving this crisis unless you really want millions of Americans to suffer the consequences of inaction or worse, foolish decisions.

We dedicated yesterday’s blog post to defined contribution plans. One of the key discussion points was the fact that participants know that they should be contributing more but most cite the fact that other expenditures (not frivolous spending behavior) are eating up most, if not all, of their income prior to being able to save for retirement. Well, it may be getting more difficult in the near future, as Student Loan interest rates are rising for the second consecutive year.

According to a Kiplinger article, “interest rates for federal student loans have inched up for the second time in as many years. The rate on undergraduate Stafford loans disbursed on July 1, 2018, or later is 5.05%, up from 4.45% last year. On Stafford loans for graduate and professional students, the rate is now 6.6%. And the rate on PLUS loans (which allow you to borrow up to the total cost of education, minus any financial aid) for graduates and parents is now 7.6%.”

The good news is that these rate increases don’t impact current holders of government loans, which account for roughly 90% of all student loans, but they certainly impact those going off to college or graduate school this year.  Furthermore, private loans don’t provide the same guarantees and protections that government loans do, so holders of those loans may in fact see higher rates impact their loan payments.

As we’ve reported before, the growth in student loan debt is certainly impacting economic activity from housing, to family unit creation, and ultimately one’s ability to save for retirement. A significant increase in interest rates could have a profound impact on our younger adults.

I read a blog post from the Squared Away Blog (Center for Retirement Research at Boston College), which highlighted findings from an Allianz study that surveyed more than 1,000 Baby Boomers and Generation-Xers. Not surprisingly, the vast majority of those in the survey that admit to being behind on their retirement savings wish that they could save more. But, as we’ve said many times before, life gets in the way, especially for lower-income households, where wage growth has been muted for quite some time, and household expenditure growth continues to outpace wage growth. As a result, they are correct in being concerned!

Unfortunately, and despite understanding that they need to do more, many are contributing 3% or less, which will never be a rate sufficient to generate even a decent retirement. The Squared Away Blog also pointed out that these participants also tend to be somewhat risk-averse in their asset allocation. But, can you blame them, especially given what has transpired in the markets since 2000? Furthermore, most of these participants have never taken an investment class, so why should we assume that they would understand and appreciate cycles within the markets?

As much as we’d like to see DB plans remain the plan of choice for employers and employees, we understand that the trends are not favorable, particularly for the private sector.  As such, we would like to see several things done to improve 401(k)s for those that are given access to them. Many of these are being adopted, but we’d prefer universal acceptance to protect the plan participant from “retiring” without the financial means to truly do so.

Desired features:

Payroll-deducted savings account sidebar that would allow for pre-tax withdrawals to fund an emergency account that would reduce the need to withdraw from one’s “retirement” account prematurely.

Auto-enrollment – Participant could decline to enroll, but they would have to take the action.

Auto-escalate with regard to contribution rates – Timing of the escalation should be every three years, at a maximum.

No loans!

No premature withdrawals when switching jobs. Account balances must be shifted into new employer’s 401(k) or participant’s IRA.

Target date funds as the QDIA – Not all TDFs are the same, and significant differences with regard to key features can impact the participant’s long-term success. Be careful when choosing the provider.

Make sure that low-cost index fund options are available. Expense ratios have been coming down, but remain high for many “active” products.

Fewer options in a fund line-up – Studies have shown that too many options lead to paralysis.

We are not fond of lump-sum distributions and prefer that 401(k) providers annuitize a significant portion of the participant’s retirement funds to be used to support monthly payouts throughout retirement.

Finally, we’d like to see employers step up to the plate and do more for their employees, too, especially given the dramatic reduction in corporate tax rates. If an employer is too small to offer an affordable retirement plan, they should be required to provide pre-tax payroll deductibility to fund state or federally provided retirement plans.

We could go on, but adopting most of the above suggestions would go a long way to securing a more financially stable retirement for all.