On March 24, 2017, I penned a blog post titled, “And Then There Are The Student Loans”. Here are the last two paragraphs from that post –

“The significant increase in the cost of education and the greater use of student loans to meet this expense is placing an unfair burden on our younger generation. This burden makes it nearly impossible for one to begin to fund a defined contribution retirement plan, but that is basically what we are left with at this stage. The more it delays funding the less likely it is that one will generate a retirement account meaningful enough to accomplish one’s goal of retiring.

At KCS, we focus on issues related to one’s ability to retire, but the burden of greater educational costs impacts so much more from establishing family units, housing, and the general demand for goods and services. It isn’t shocking to us that the US economy hasn’t generated a >3% GDP growth since 2005 when one looks at the significant growth in student loan debt since 2006.”

The Student Loan Debt and Housing Report 2017 by the National Association of Realtors and the nonprofit group American Student Assistance finally bring some relevant statistics to this discussion (thanks, Mike “Mish” Shedlock for your blog post), and they are UGLY!

51% of student loan borrowers have more than $40,000 in debt

83% of non-homeowners reports that student loan debt is keeping them from buying a house, and the delay in buying a home is seven years!

32% of student loan borrowers have defaulted or forbore on their loans

Only 13% have not had a life event delayed, while more than 50% have said that student loan debt has delayed further education or starting a family.

35% of younger Millenials (1990-1998) live with family compared with older Millenials (1980-1989)

Given the demise of the DB plan and the greater use of DC plans, in which the individual is primarily responsible for funding their retirement program, is it realistic to believe that these accounts are getting the funding that they need? Of course, it isn’t! Funding a DC plan with as much as you can as early as you can goes a long way to preparing one for retirement, but that is becoming a pipe dream in this environment.

We have a retirement crisis, and it will only get worse if we can’t solve how our citizens can afford education and healthcare costs that have gone through the roof, while still being able to contribute to their DC plan!

Regrettably, defined benefit (DB) plans are being frozen and/or terminated at an alarming rate.  Why? Could it be that the plan sponsor and asset consulting community has been focused on the wrong objective? For both public and multi-employer plans, sponsors are laser focused on trying to meet the return on assets (ROA) assumption. But, is that the real goal?

At KCS and Ryan ALM, we believe that the true objective of any DB plan, private or public, is meeting the promise (benefit) at the lowest cost possible.  It is not trying to generate the greatest return.  Injecting more risk into the asset allocation process achieves one goal – getting more risk! It does not guarantee a greater return.

In this market environment in which both equities and bonds have enjoyed lengthy bull markets, how likely are we to see meaningful longer-term returns that will help plan sponsors achieve the ROA?  Not, likely! Injecting more risk in this environment could potentially sabotage the funded status should the equity and bond markets experience a significant decline.

Sponsors of DB plans cannot afford a further increase in contribution expense. Focusing on delivering the promise at the lowest cost might potentially reduce the plan’s returns in the near-term, but this de-risking approach is likely to stabilize both the funded status and contribtion expense, while preserving this important benefit for the long-term.

You know where we stand on this subject. What do you feel is the true objective?

A recent WSJ article highlighted findings from a Gallup survey indicating that a majority of people hope to work later in life. Here’s the reality.

In fact, the average retirement age is 61, with only 4% of seniors working until the age of 70 or older. A survey by the Federal Reserve also found that only 7% of retirees claimed that they received income from a job.

Gloomy stats if you are like the vast majority of Americans who haven’t been able to save enough money in a defined contribution plan to retire.  The idea that one can defer saving for retirment until later or continue to work to stretch out retirement savings has proven to be a pipe dream for most.

The demise of the DB pension has certainly stressed the finances for many retirees.  We’ve often written about the social and economic consequences of our failure to adequately prepare our employees for retirement.  The inability to extend one’s time in the workforce is just compounding this issue.

President Trump and Republicans are trying to make tax reform a priority, but few details have emerged at this point.  Complicating the conversation is a desire to make any tax reform revenue neutral.  There have been a few ideas on how Congress might accomplish that objective, but they involve many of the favored deductions. One in particular that has quietly bubbled up is the elimination of the tax-deductibility for 401(k) contributions.  In a 2014 government analysis, it was estimated that the taxing of 401(k) contributions would generate roughly $144 billion during a 10-year period.

But, at what future cost? The taxing of contributions instead of distributions would likely lead to a significant reduction in the use of these investment vehicles. According to the Committee on Investment of Employee Benefit Assets (CIEBA), only about 10% of 401(k) participants utilize Roth accounts (after-tax funding of DC plans).  We already have a retirement crisis unfolding in the U.S. as a result of the demise of the defined benefit plan, why exacerbate the situation?

Furthermore, the U.S. does eventually “capture” this tax revenue upon distributions from individual accounts, so any discussion about lost revenue is just not correct.

We know that it is highly unusual that individuals save for retirement outside employer sponsored programs. Do we really need a greater percentage of our workers left with little to nothing as they near retirement? Also, the tax revenue that will be lost as a result of financial companies managing far less retirement money will further contribute to the revenue shortfall likely to occur as a result of this action.

As we’ve highlighted many times, we don’t think that 401(k) plans are an appropriate replacement for the DB plan, but they are really the only game in town for the private workforce.  Taxing the contributions into these plans instead of the distributions will basically be their demise.   Then what?

We are pleased to share with you the latest article in the KCS Fireside Chat series.  In this article, Dave Murray, DC practice Leader, discusses financial wellness and other trends in the DC landscape.  We are confident that you will find Dave’s comments insightful.

In a KCS blog post from earlier today, we discuss the output from a recent WSJ/NBC news poll that highlights the uncertainty around retirement in the U.S. As we’ve reported on numerous occasions, there will be profoundly negative social and economic consequences of our failure to adequately prepare our workers for retirement.

Please don’t hesitate to reach out to us with your feedback and questions.

In a newly released WSJ/NBC news poll, only 13% of Americans expect to retire before age 60, down 10 points since 1999. At the same time, 28% of workers now expect to retire beyond age 70, if at all, which is up 10 points.  Alarmingly, 43% of working class whites, mostly in rural areas, now expect to retire after the age of 70. The social and economic impact of our declining retirement readiness is upon us!

What is interesting about 1999 is the fact that most DB plans in the U.S. were fully-funded at that point.  Instead of locking in that success, plans and their consultants threw caution to the wind by significantly reducing fixed income exposure as interest rates fell, while loading up on equities and alternatives. That decision has crippled Pension America, as funded ratios have plummeted and contributions costs have escalated.

With the demise of the defined benefit plan and the greater reliance on the defined contribution plan, this social and economic divide between the haves and the have-nots will continue to be exacerbated.

We’ve attached for you a video highlighting a discussion (debate) between Ron Ryan, Ryan ALM (and a KCS strategic partner) two leading actuaries, and an asset consultant.  The session took place at the Florida Public Pension Trustees’ Association (FPPTA) conference in June. It covers many hot topics surrounding defined benefit pensions today.  It is a lengthy video, but definitely worthy of your time.  As you will see, Ron is not shy about bringing new ideas to the fore. Regrettably, our industry suffers from incredible inertia.  Doing the same thing for the last 50 years hasn’t worked. It is about time that we challenged that operating approach.

As you will see, Ron is not shy about bringing new ideas to the fore. Regrettably, our industry suffers from incredible inertia.  Doing the same thing for the last 50 years hasn’t worked. It is about time that we challenged that operating approach before DB plans go by way of the dinosaur.

Please don’t hesitate to get back to us with any comments and/or questions.  We are happy to engage in this conversation with you.  As you’ve heard us say many times, we are exceedingly concerned about the potentially negative social and economic ramifications from our failure to preserve and protect the benefits from DB plans, whether they are sponsored by public, private, or multi-employer institutions.

Milliman, Inc. has released the latest update for their Public Pension Funding Index (PPFI), which covers the nations largest 100 public plans, and it indicates a slight pickup in the aggregate funded status from 72% to 73% as of June 30, 2017.  Obviously, any improvement is a good sign, but what will plan sponsors do in response? The U.S. equity market has enjoyed a nearly unprecedented bull market run since March 2009.  Despite this significant advance, funded status is still quite weak. What happens to public plans once this equity market peaks and begins to slide?

We believe that every pension plan should have a de-risking mind-set, and a glide path by which it removes risk as funded status improves. Sitting with a traditional asset allocation, when both bonds and stocks are nearing peak performance for their respective cycles, is not prudent. However, if the focus remains on the return on asset assumption as the primary objective, it is highly likely that public DB plans will continue to swing for the fences.

We’ve seen this mind-set creep into professional baseball during the last couple of decades, and what we’ve seen is a few more homers, but many more strikeouts.  At KCS, we don’t think that Pension America nor the employees, employers, or tax-payers who fund these plans can afford more strikeouts at this time! The funded status of public pension plans got hammered in both 2000-2002 and 2007-2009. We are seeing public DB plans eliminated and frozen during a period of time that has been favorable for traditional asset allocation strategies.  Can you imagine what will happen should we enter bear market territory for either or both of these asset classes?

DB plans are incredibly important for the average plan participant’s financial well-being. Let’s not screw up their futures by focusing on the wrong objective at this time. DB plans should be striving to meet the promised benefits at the lowest cost, not the greatest return. Striving for the latter guarantees more volatility, but not the promise of delivery.

I happened to see an article on the CNBC Money website highlighting the troubling issue surrounding the lack of financial literacy in our country. When asked three basic questions related to inflation, stock risk, and interest, 70% of respondents failed to correctly answer all three questions.

As disappointing as this result is it shouldn’t be shocking given the lack of financial literacy taught in our schools.  The article mentions that fewer than 50% of our states require financial leteracy to be taught in our public schools.  As an example, New Jersey has only a 2 credit course mandated to be taught in one’s Sophomore year, and it relates more to basic principals than it does to handling a retirement account.

What makes this particularly troubling is the fact that we continue to migrate our employees away from DB plans that are professionally managed to DC plans that force the individual participant to “manage” their account.  As you may recall, the DC plan was originally created as a means for wealthy executives to defer more income.  It was never intended to be anyone’s primary retirement vehicle.

Not surprisingly, this migration is creating a retirement crisis in our country.  Asking untrained individuals to fund, manage, and disperse their retirement account is poor policy, and the social and economic consequences of this action will be quite grave. I don’t need a survey to understand that something needs to change, and fast!

As a follow-up to our blog post (U.S. Debt Ceiling Debate – Blah, Blah, Blah) from yesterday, U.S. debt held by the Federal Reserve can be written-off at anytime, without consequence.  The result of this action would reduce current outstanding U.S. debt by more than $3 trillion, freeing up considerable room under the current debt ceiling, while eliminating the involvement of Congress to debate an unnecessary action.

Why isn’t this done? Regrettably, as we discussed yesterday, most of our Congresswomen and Congressmen have no clue as to how our monetary system works – none! Furthermmore, concern about the impact on the U.S. bond market from the future “dumping” of Treasury bonds has investors needlessly worrying about the potential that interest rates would rise.  This concern, although unfounded, would be eliminated by retiring our Treasury debt held by the Federal Reserve.