My plan was up 10% in 2014 – Was that Good?

We frequently receive updates in our email in-boxes about various pension funds and their returns in 2014, and not surprisingly the numbers vary quite a bit.  According to Wilshire’s TUCS comparisons, the average public pension plan was up 6.76% in 2014. However, we’ve seen some funds reporting returns closer to 10%.  It seems to us that a plan did better the more traditional the plan’s asset allocation, meaning more equities and fixed income, and less in alternatives, particularly hedge funds.

In most cases the announcement of a total return was hailed as good or bad depending on how it did relative to the plan’s return on asset assumption (ROA).  However, is that really the true objective? If a plan generated a 10% return and its ROA was 8% (49% of public plans have 8% as their ROA) it was reported as a great year.  However, what did the plan’s liabilities do in 2014? Since most sponsors and consultants assume that liabilities grow at the ROA, they would likely assess that 2014 was good on both the return and liability front.  Unfortunately, they would be wrong.

With the precipitous decline in US interest rates continuing through much of 2014, the average defined benefit plan had its liabilities grow more than 15% in 2014.  Given this fact, I’d say that any return that didn’t exceed liability growth was a poor year, with the average public pension (6.8%) doing quite poorly versus liability growth.

Can you imagine if you were playing a football game without a scoreboard? Let’s assume you are in the fourth quarter and you’ve scored 27 points.  How do you play your offense or defense? Do you get more conservative or aggressive? You don’t know, do you? Exactly! Well, this is how Pension America is playing the game.

A significant majority of DB plans only get a look at their liabilities every 1-2 years, and the results are usually presented with a 3-6 month lag.  It is quite difficult to have a responsive asset allocation when you don’t know whether or not you are winning the pension game versus your liabilities, just as it is impossible to play football if you don’t know how your opponent is performing.

At KCS we place liabilities and the management of plan assets versus those liabilities at the forefront of our approach to managing DB plans. Pension America has seen a significant demise in the use of DB plans, and we would suggest it has to do with how they’ve been managed. Focusing exclusively on the asset side of the equation with little or no regard to the plan’s  liabilities has created an asset allocation that is completely mismatched versus liabilities.  It is time to adopt a new approach before the remaining 23,000+ DB plans are all gone!

Delayed Gratification – Just How Important Is It?

The following Tweet was posted by Vanguard this morning – “Delaying gratification, avoiding debt, & saving are all central to a financial literacy program for student”. We all know that we are more responsible for funding our retirement than at any time in the last 60 years, but just because we know doesn’t mean we have the ability to do so.

Defined Contribution plans are the vehicles of choice for most private sector employers, if not their employees. However, funding these plans, even to meet the company match, is not easy for many (most) low to middle income households. At KCS, we’ve discussed the benefits of participating in a DB plan versus a DC plan since our founding.

But, if you have a job, don’t have substantial student loan our housing debt, and can afford to make sizable contributions into your retirement program, it is better to delay gratification and make those contributions as early and often as possible. Why? Because the math of compounding truly works.

For instance, if a 22 year old can make a monthly contribution of $833 for 10 years, the $99,960 in contributions growing at 4% / year will become $438,393.12 upon reaching age 65. Again, that is with making contributions for only the first 10 years. At that point, you’ve basically funded your retirement and now you can begin acquire some of the other assets that you’ve been deferring.

However, if you can’t fund your retirement upfront with sizable monthly contributions, but can only put in $194 / month for the next 43 years growing at 4% until age 65, your balance upon retirement would only be $256,648.87, or roughly $182,000 less in total assets. WOW!

Finally, just think about how little you’ll be able to accumulate in your account if you delay making contributions until the age of 32. For instance, if you can only make that $194 / month for the next 33 years your account balance at age 65 is only $154,500, more than $100,000 less than you would have had if you began contributing the $194 / mo for the prior 10 years.

So, DC plans need funding often and early to be successful, but having the financial wherewithal is not a given, and having the discipline is not easy.

Double DB presented on Fox Business today

Double DB presented on Fox Business today

I had the pleasure to represent the Double DB pension alliance on Fox Business today.  We introduced the Double DB plan in a conversation with Adam Shapiro.  We hope that you find our conversation enlightening.  Ed Friend, Ron Ryan, Barry Gillman and KCS are looking forward to fielding your questions.  Enjoy!

Seeing “Double DB” in Your Future?

Seeing “Double DB” in Your Future?

The latest KCS Fireside Chat is attached for your review. This edition is the 24th Fireside Chat in our monthly series. This one addresses the development of a new hybrid plan called the Double DB. KCS is pleased to be involved in bringing this new pension plan design to the marketplace. We believe that sharing risk among both the plan sponsor and the participant is the better approach than one entity bearing all the risk. This exciting new pension plan design accomplishes this objective, while also bringing many additional attributes to the marketplace.

Please don’t hesitate to call on us if we can answer any questions that you might have about this exciting development.

Unintended Consequences

Unintended Consequences

Recently I had the opportunity to speak at the Financial Research Associates’ conference in NYC on non-traditional fixed income. I had the pleasure of participating on a panel with an industry icon – Ron Ryan, Ryan ALM  He and I presented on the topic “Taking a Close Look at the Liability Beta Portfolio”.  However, before presenting our views on the proper use of fixed income in a defined benefit plan, especially in a low interest rate environment, Ron and I addressed the unintended consequences from accounting rules, both GASB and FASB, that have lead to an under-reporting of plan liabilities and an overstatement of plans assets.  Given both, it is obvious that funded ratios are overstated, too.

The IASB (International Accounting Standards Board) has moved to a mark to market accounting of both pension liabilities and assets.  It isn’t too far fetched to believe that the US will adopt these same standards in the near future.  Unfortunately, since GASB uses the ROA to value plan liabilities, it becomes clear as to why the pension community continues to focus on the asset side of the equation instead of the liability side, which should be driving asset allocation and investment structure.

Attached for your review is our presentation.  We encourage you to reach out to us if you have any questions or challenges.



Could This Hybrid Plan Revolutionize the Pension Industry?

As we’ve seen recently in NJ with Governor Christie’s decision to withhold the State’s annual required contribution, public and private pension funds are under extreme funding pressure.  As a result, traditional DB plans continue to be terminated / frozen in rapid fashion, with new employees being migrated to defined contribution structures. Unfortunately, the complete shift in risk from the sponsor to the employee is proving to be a disaster, with most employees incapable of funding and managing their own retirement (median account balance for a DC participant is slightly more than $13,000).

Importantly, KCS is pleased to announce that we’ve entered into an alliance with Ed Friend, a long-tenured and highly successful actuary, Ryan ALM and Longevity Financial Consultants to bring to the marketplace a patent pending hybrid DB structure that provides the plan sponsor with a fixed cost feature. The product is called Double DB, and as a hybrid, combines elements of both DB and DC. We think that this new design could revolutionize the pension industry by making the use of defined benefit plans more economical for the sponsoring organization.

Please don’t hesitate to reach out to us if you’d like to receive more information on Double DB. We think that both employers and employees are better served utilizing the Double DB design.