A Lucrative Lost and Found

When I was growing up, I frequently misplaced items either at school or at a ball field/court, much to the chagrin of my parents.  Fortunately, I wasn’t the only one to do so, and as a result, the school had a table located in the hall by the main entrance that was for all the items that were lost by my classmates and me.  I really didn’t own anything of value, as this was long before cell phones, headphones and Ipads, and my sneakers were usually PF Flyers or Keds – Nike hadn’t been discovered yet. So I was not devastated if one of my items didn’t turn up, but certainly grateful when one did.

Just today, I was reading about the fact that between 2004 and 2013 (and I can’t imagine things have improved) plan sponsors failed to identify the owners of 25 million 401(k) accounts.  As you can imagine, the failure to reunite an account with an employee has gotten the attention of the powers that be in Washington DC.  In fact, the Government Accountability Office (GAO) recently outlined challenges that could be inhibiting workers from keeping track of their “multiple” accounts along with concerns about a lack of guidance with regard to reuniting plan participants with unclaimed property.

Here are a few of the challenges identified by the GAO, including; 1). individuals who accrue multiple accounts over the course of a career may be unable to consolidate their accounts by rolling over savings from one employer’s plan to the next, 2). maintaining communication with a former employer’s plan can be challenging if companies are restructured and plans are terminated or merged and renamed, and 3). key information on lost accounts may be held by different plans, service providers, or government agencies, and participants may not know where to turn for assistance.

The 25 million accounts total $8.5 trillion in assets! Unfortunately, 16 million of the 25 million accounts have balances that are <$5,000, which under current guidelines might just see these balances lost. How? According to the GAO, “accounts with a balance of $1,000 or less can be cashed out of a plan without participant consent; account balances can be reduced by tax withholding and early distribution taxes, or conditionally forfeited by the plan sponsor until the participant emerges to make a claim.” In addition, the GAO reports that “accounts with balances under $5,000, and sometimes those with larger balances, can be forcibly transferred to an IRA, where the account balances may decrease over time as the fees outpace low investment returns.”

The onus isn’t squarely on the plan sponsor’s shoulders, as employees have a responsibility to keep current and former employers up to date with a current address so that retirement information can be shared as needed, while also being responsible for responding when contacted by the plan sponsor.  There is no mandated frequency or method with regard to communicating with former employees, and no obligation to chase down unresponsive former employees.

Unfortunately, neither the DOL nor IRS has set up a “lost and found” for misplaced 401(k) accounts, so it would behoove you to review your work history to evaluate the possibility that you just might have one or more abandoned accounts before your misplaced account is permanently lost.



Most Women To Work After Age 65

A recent article in Planadvisor.com highlighted findings from the Transamerica Center for Retirement Studies that a majority of women (53%) plan to remain in the workforce after the age of 65, and 13% plan to never retire.  The reasons for remaining in the workforce are not surprising, and they include the need to supplement income, fear that Social Security won’t be there or will be diminished when they need it, and the lack of retirement savings.

According to TCRS, these fears are not unwarranted, and there perceptions of the issues may be more realistic than their male counterparts.  Regrettably, women earn only 80.5% of the salary that males earn. Furthermore, they are more likely to work part-time at some point during their careers and to also be out of the labor force for parenting or caregiving responsibilities. Only 12% of women are confident that they will be able to retire while maintaining a “comfortable lifestyle”.

Here are some other notable statistics from the study:

While 82% of men are saving for retirement, only 73% of women are. Both men and women started saving for retirement at the median age of 27.

While 75% of men are offered a retirement plan, only 66% of women are.

While 28% of women work part time, only 14% of men do so.

While 77% of women who are offered a retirement plan participate in it, 84% of men do.

Men contribute an average of 10% of their salary, while women contribute 7%. However, while 31% of men have taken an early withdrawal, loan, or hardship withdrawal from their retirement plan, only 27% of women have done so.

While fully two-thirds of men are saving for retirement outside of their workplace retirement plan, only 52% of women are doing the same.

Women say their total retirement savings median is $42,000, and men say it is $123,000. Thirty-eight percent of men say they have saved $250,000 or more, but only 20% of women can say the same.

In fact, 21% of women and 12% of men have less than $10,000 in retirement savings.

In celebration of International Women’s Day (3/8), let’s remember the women in our lives who have sacrificed so much during their careers and, as a result, have likely negatively impacted a financially sound retirement.

Problem? Maybe. But It Isn’t The Federal Debt!

There is an article in today’s WSJ reporting on a recent study by two Harvard economists claiming that the recent tax legislation will not pay for itself but in fact, will lead to a $1.2 trillion increase in the Federal debt during the next 10 years.

On March 5th, there was an article in the NY Post debating the “morality” of adding $1.5 trillion to the national debt, while neglecting to discuss the “$82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades”.  The author, Brian M. Riedl,  claims that “future historians — and taxpayers — are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.”

We continue to be amazed at articles such as these that claim that the U.S. economy will collapse under this debt burden as if it were household debt. The U.S. benefits from having a Fiat currency. With this currency comes the ability to meet all of our future obligations.

Furthermore, anyone who has studied Modern Monetary Theory (MMT) appreciates the fact that the liabilities highlighted above (SS and Medicare) will produce income for the private sector if the government deficit spends. I was introduced to MMT by Charles DuBois, a former partner of mine at Invesco, who has spent years studying these economic concepts.

According to Mr. DuBois,  “the problem is not the federal debt, but whether all of this “income” will make the economy too strong – causing inflation”. Hopefully, we will create a robust economy that will continue to meet the enhanced demand for goods and services created by this significant stimulus. So as the title of this article suggests, the Federal Debt isn’t the issue, but the stimulus that results from it just might be.

They Should, But They Can’t

According to a recent study by Edward Jones, 51% of Americans aren’t actively contributing to an employer-sponsored 401(k) account nor are they contributing to an IRA (only 37% do) or HSA (only 18% are).  Are we just an instant gratification society, as some of my peers would argue, or are there other tangible reasons for this inaction?

First, many Americans work for small employers that don’t offer defined contribution plans, and we know that saving for retirement outside an employer-sponsored plan has been challenging. Second, real family income growth has been negative for most Americans (bottom 95%) since 2007 and less than 0.9% annually since the late 1970s for the bottom 80%, according to the Economic Policy Institute.

When addressing wage growth, it shouldn’t shock anyone to read that low wage earners have actually lost ground when adjusting for inflation, while the shrinking Middle Class has seen only a 6% increase since 1979. Without wage growth, how is the “average” American to keep pace with significant increases in costs for housing, education, healthcare, food, etc in an environment where Corporate America is contributing far less in benefits to it employees?

source: Economic Policy InstituteMost Americans are Getting Poorer

Given the weak growth in family incomes, it is not surprising that we have seen an unprecedented rise in debt/household.  Americans today have amassed more than $1.5 trillion in student loan debt and more than $1 trillion in Auto debt.  Revolving credit card debt is fast approaching $800 billion, too.  When factoring in mortgage debt, Americans have amassed more than $13 trillion in total debt.

The burden of debt is becoming so heavy that more than 73% of Americans are now dying in debt, with an average balance of $60,000, and it will likely get worse.  So no, I don’t believe that we are a society of careless individuals placing instant gratification ahead of appropriately planning for their futures. The U.S. is fast becoming an economically stressed population without the financial wherewithal to keep their collective heads above water.

New Research From National Institute on Retirement Security

The National Institute on Retirement Security has recently published a report on the retirement outlook for Millennials, and the findings are ugly! The deeply troubling truth is that 66% of this cohort have saved nothing.

According to the NIRS report, “one-third of this generation actually participates in employer-sponsored plans despite the fact that two-thirds of Millennials work for employers that offer retirement plans.”  Most troubling to us is the fact that “the eligibility requirements set by employers, which keep 45% of working Millennials out of plans, drives this coverage gap rather than workers choosing not to save for retirement.”

That last point is shocking to us. Given the terrible state of our retirement system for current workers across the age spectrum, why are businesses creating barriers that make saving for retirement even more difficult? We know that most American’s who are participating in company-sponsored plans are not saving enough, but at least they are starting the process. Setting up impediments to participation is just wrong!

NJ’s ROA Back to 7.5%

Governor Christie reduced the return on asset assumption (ROA) for the NJ pension system during the waning days of his administration. The reduction in the ROA from 7.65% to 7.0% was a dramatic move, as it would significantly increased contribution expenses for the state and municipalities, but it would have begun the process of stabilizing this poorly funded system.  As a point of reference, the ROA was 8.25% at Christie’s inauguration for his first term.

Governor Murphy has just announced that he is reversing this move to return the ROA to 7.5%.  According to Murphy’s acting state treasurer, Elizabeth Muoio, Christie’s surprise reduction in the pension system’s ROA placed an “undue stress” on the municipalities that would have to find the extra cash. They estimated that the reduction in the ROA to 7.0% would increase local governments’ bills by $422.5 million and the state’s by $390.3 million, according to their actuary.

A spokeswoman for the Department of Treasury, Jennifer Sciortino, said the move from 7.65% to 7.5% will mean an additional $52 million in costs for the state and $91 million for local employers. The rate is forecast to drop to 7.3% for 2021 and 2022 and then to 7% in 2023.

As a reminder, the ROA is a non-calculated number (otherwise it wouldn’t always be a whole #). We often refer to these ROA estimates as Goldilocks numbers for they aren’t too hot or too cold, but seem just right.  Instead of messing with the ROA estimate which determines annual contribution expense, NJ should engage in an Asset Exhaustion Test (AET) to determine the actual return needed to ensure that the solvency of the fund.  They may just be surprised that the combination of current assets and future contributions may not need as high an annual return as presently forecast to meet future liabilities.

One caveat: determining what future contributions will look like for NJ is often a difficult task given the fact that the annual required contributions (ARC) have not been fully funded since George Washington slept in Trenton!



PE – All The Rage!

Saw a headline this morning on the Chief Investment Officer magazine website that highlighted the fact that West Coast pension plans, including WSIB, Oregon Investment Council, and SFERS were committing another $1 billion to private equity.  I don’t know what total commitments are to the asset class in the last 18-24 months, but it seems like a ton of assets have been earmarked for this space.

As in the past, plan sponsors and their consultants can overwhelm an asset class/strategy by just the sheer size of the commitments.  I’ve recently witnessed several presentations at a number of industry conferences that had the presenter and their firm forecasting the return/risk profile for PE for the next 10-20 years. The expectations are quite rosy, and I have to wonder if they are contemplating the incredible push into this asset class that will likely subdue future returns.

There are likely to be a number of great ideas that are funded through these capital allocations.  But, at what price? When too much money is chasing too few good ideas, the “winner” tends to be the loser longer-term.