Tag Archives: KCS

04.16.14
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U.S. Treasury STRIPS – The Naked Truth

At KCS, we have been sharing ideas with plan sponsors to reconfigure their existing fixed income exposure into an enhanced asset allocation framework that might just stabilize a plan’s funded status and contribution costs.  The motivation has been driven by the fear of rising interest rates.  Unfortunately, this fear has provided the impetus for many of our friends in the industry to shed exposure to domestic fixed income programs.  Stop!

Despite the near unanimous expectation that rates have to rise from these “historically low levels”, the fact is that interest rates have actually fallen rather significantly year to date.  In fact, the U.S. 10-year Treasury Bond has seen its yield fall by 37 bps (as of 4/15).  The KCS crystal ball is no clearer than that of any other market participant, so why “guess” where rates are going.

We think it would be advantageous for plan sponsors to reconfigure their existing fixed income exposure to include a separate, lower risk portfolio that matches near term benefit payments for the next 5-7 years depending on the current funded ratio of the plan and projected future contributions. This strategy will improve the plan’s liquidity, while extending the investing horizon for less liquid assets that we would use to support their active portfolio.

We have recommended that the lower risk portfolio be invested in U.S. Treasury STRIPS to match benefit payments.  However, that instrument’s name raises more questions than answers, and has often turned potential users off before the conversation really heats up.  We are here today to say that STRIPS, although misunderstood, are actually low risk, useful fixed income securities.

STRIPS is an acronym for “separate trading of registered interest and principal securities”. Treasury STRIPS are fixed-income securities, sold at a significant discount to face value and offer no interest payments because they mature at par, which is why they are so good at matching projected cash flows. Backed by the U.S. government, STRIPS, which were first introduced in 1985, offer minimal risk and some tax benefits in certain states, replacing TIGRs and CATS (…retired to the zoo?!) as the dominant zero-coupon U.S. security.

If you are concerned about your plan’s funded status, the direction of interest rates and / or the current composition of your fixed income assets, call us to discuss a new path forward. We are here and ready to help you!

04.14.14
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KCS First Quarter Summary

KCS First Quarter Summary

We are pleased to share with you the KCS First Quarter Summary. The markets proved to be more volatile during the last three months, but still positive when all was said and done. Unfortunately, plan liabilities outperformed assets by more than 5% during the quarter, reversing the trend that we witnessed in 2013. Importantly, KCS continues to provide education to a variety of market participants through various conference appearances. We feel that this is one of the most important functions for any asset / liability consulting firm.

04.08.14
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Here is some DC advice that you should take seriously!

Here is some DC advice that you should take seriously!

How your 401(k) could disinherit your kids via

The above Tweet caught my attention earlier today.  I hope that you’ll take a few moments to read the article.  The advice that they give is critically important.  KCS partner, Dave Murray, experienced this issue while working with one of his clients.  In Dave’s case, a young woman, with a decent-sized DC plan balance passed away.  Her parents assumed that they would inherit her plan balance, but unfortunately years before she had designated a boy friend as her beneficiary.  Despite the fact that this young man was no longer in the picture, the plan document superseded her will, and he was given the proceeds. 

Given the serious consequences that this lapse can create, we’d recommend that you review your designated beneficiary(ies) annually.

04.07.14
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Europe isn’t wittnessing a great recovery!

As readers of the KCS Blog know, we have been and remain negative on the Euro-zone for a variety of reasons, but specifically because the Euro is a failed model. Without the ability of the Euro-zone constituents to devalue their currency when needed, and they can’t because it isn’t a Fiat currency, these economies / countries will continue to stagger.

Here is some perspective brought to us by Mark Grant:

“Let us peer specifically at Europe. Real inflation in Europe, adjusted for
austerity taxes, has been running at -1.5% for the past five months according to
London’s Telegraph. They are experiencing a very real bout of Deflation. Prices
are down -5.6% in Italy, -4.7% in Spain, -4.0% in Portugal and even -2.0% in
Holland. According to Bloomberg the EU is missing its Inflation target by more
than 150 bps on the downside. Bank of America has opined that the current
stagflation could cause a rise in France’s official debt to GDP to 105%, 148% in
Italy and 118% in Spain. The ECB has said that it is discussing some type of
Quantitative Easing though what it might be has yet to be seen. Yields are down
across Europe but the economies are no better.”

As we’ve discussed, austerity hasn’t worked. Debt to GDP is rising in most Euro-zone countries, employment remains incredibly high, and growth and inflation are non-existent. Clearly this isn’t a great formula for success.

Only time will tell, but don’t be shocked if one or more constituents are no longer sharing the Euro in the next 2-3 years.

04.07.14
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Retirement Confidence Slips Again, according to the IRI

The Insured Retirement Institute (IRI) today released a new report showing that Baby Boomers’ confidence in their retirement plans continues to decline, a trend dating back to 2011, when IRI first began tracking Boomers’ retirement expectations. During that time, the percentage of Boomers showing high levels of confidence in their financial preparations for retirement dropped from 44 percent to 35 percent. But while confidence continues to slip, IRI found slight improvements in several important measures, including the percentage of Boomers (51-67) with retirement savings, their total savings, as well as the number of Boomers with a retirement savings goal and a planned retirement age.

While Boomers’ current economic outlook has also soured, they are beginning to show optimism that their financial situation will improve, with 42 percent of Boomers expecting things to improve in five years, compared to 33 percent of Boomers who shared this view in 2013.

Other key findings from the report:

  • A quarter of Boomers postponed their plans to retire during the past year.
  • 28 percent of Boomers plan to retire at age 70 or later.
  • One in 10 Boomers prematurely withdrew savings from a retirement plan during the past year.
  • 80 percent of Boomers have retirement savings.
  • About one-half of Boomers with retirement savings have $250,000 or more saved for retirement.
  • 55 percent of Boomers have calculated a retirement savings goal, up from 50 percent in 2013.
  • Of those calculating a retirement savings goal, 76 percent are factoring in the cost of health care.
  • Three in four Boomers say tax deferral is an important feature of a retirement investment.
  • Nearly 40 percent of Boomers would be less likely to save for retirement if tax incentives for retirement savings, such as tax deferral, were reduced or eliminated.
  • Boomers planning for retirement with the help of a financial advisor are more than twice as likely to be highly confident in their retirement plans compared to those planning for retirement on their own. 

The IRI study is based on a survey of 800 Americans aged 51 to 67.

03.26.14
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TIme for a New Gameplan?

TIme for a New Gameplan?

As we touched upon in our January, 2013 Fireside Chat, the Private, Public and Union pension deficit in America exceeds $4 trillion, when assets and liabilities are marked to market. Since 1999, pension asset growth has significantly underperformed liability growth and the return on assets (ROA), causing increased contribution costs and a national pension crisis. The true objective of any pension plan is to fund their liabilities (benefit payments) at low and stable contribution costs –with reduced risk through time.

Do you need a new game plan? We’ll explore the asset allocation issues sponsors face and offer solutions for underfunded plans.


 
02.06.14
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Rotary International and The Gift of Life Foundation

I am going to use the KCS Blog today to reflect on a wonderful organization with which I have only recently (2+ years) become associated. 

When I decided to start KCS in August 2011, one of the benefits for me was the opportunity to eliminate my commute into NYC, which I had done since I was 18 (34 years in total), when I began my college career at Fordham.  What I didn’t know at the time was that I was going to be invited to join the Wyckoff / Midland Park Rotary.  As someone who would routinely leave his home at 6am or earlier to commute to work, attending Rotary meetings every Thursday morning at 7:30 am was just not in the cards. 

When I was first approached to join, I gladly accepted the invitation to check out Rotary, but I was very skeptical.  I had neither the  knowledge of what Rotary did nor who they served, and my unease was further exacerbated by my fear that I would likely be asked to wear some funny looking hat and to learn a secret handshake. Despite those reservations, I was willing to listen to their “sales pitch”. I am so thankful that I took that plunge.  Following a brief courtship, I became a member of the local Rotary.

The W/MP Rotary supports numerous local, regional and international programs.  We sponsor and financially support scholarships for local high school students and leadership programs for those children who are willing to bring the output from these programs back into their schools.  These are all wonderful endeavors, but the one program that I am most proud that our club participates in is the “Gift of Life” program for which Rotary is a major supporter.  Currently, our local club is sponsoring a young child from Peru, who will have heart surgery next week.  He and his mother are staying with one of our members, and many of the club’s members have helped to shuttle them from one doctor’s appointment to another.  It is this sense of community that so impresses me.

Just this morning, we had a surprise guest from Uganda.  Grace was the very first recipient of a “Gift of Life” in 1975. She remains very much involved with the Gift of Life program in Uganda, where she helps to organize the many missions of hope that travel to Uganda.  She has felt compelled to give back to this program that obviously had such a profound impact on her life, in addition to the lives of the more than 17,000 children and young adults that have received these amazing gifts.

If you haven’t had an opportunity to become familiar with Rotary, I’d like to encourage you to do so.  Find a local chapter. Get involved.  Rotary is all about service above self. There are currently 1.2 million members, in more than 200 countries around the globe.  In addition to the Gift of Life program, Rotary began a fight against polio in 1979 with a project to immunize 6 million children in the Philippines. By 2012, only three countries remain polio-endemic—down from 125 in 1988. Rotarians have immunized more than 2 billion children, and contributed or helped raise more than $10 billion to fight this horrible disease. Incredible! 

Starting KCS in August 2011 has been wonderful, but having the opportunity to get involved in Rotary because of being imbedded locally in my community has been priceless!

 

01.31.14
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ETPs, ETFs – WTH?! KCS’s February Fireside Chat

ETPs, ETFs – WTH?! KCS’s February Fireside Chat

We are pleased to share with you KCS’s February 2014 Fireside Chat.  This article is related to “ETFs”.

…What’s the Hype?!

 

As philosopher Jose Marti once said, “Like stones rolling down hills, fair ideas reach their objectives despite all obstacles and barriers.  It may be possible to speed or hinder them, but impossible to stop them.” So goes the growth in Exchange Traded Products (ETPs)! Although ETPs have been around since 1993, the growth in these investment products has been startling during the last decade, and especially in the last five years.  On a global basis, it is estimated that there exist more than 4,700 ETPs from more than 200 providers with assets exceeding $2.1 trillion and traded on 56 exchanges. Wow! 

 

Please click onto the link to gain access to the entire article.

01.21.14
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“The U.S. Pension Crisis”

Congratulations to Ron Ryan, CEO at Ryan ALM, on the publishing of his book titled, “The U.S. Pension Crisis”.  Ryan’s book articulates what needs to be done NOW to save America’s pensions. 

When testifying before the ERISA Committee in 2003, Ron highlighted the issues related to GASB and FASB accounting rules, and the distortions to contributions, funded ratios, earnings and balance sheets brought about by their failings.  This book is a must read for anyone who truly wants to understand why our defined benefit plans are in such a state right now.

01.15.14
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Asset Consulting Firms and Their Consultants Aren’t Commodities

The environment for asset consulting firms is quite challenging.  Historically, there have been few barriers to entry, and measuring the value-add provided by the asset consulting firm has been difficult to gauge.  As such, hiring decisions have often come down to price, with the low bidder more often than not winning the assignment.  For those firms fortunate to be given an assignment, the life cycle of the relationship is generally fairly long (about 7 years), as it usually takes a departure of the consultant or a major screw up before the relationship is terminated.  This practice has to change.

Given the current state of defined benefit plans in the US and abroad, this is not the time to fiddle while Rome burns. It is imperative that asset consultants be judged for the value that they bring to a relationship, and they should be compensated based on that value-add.  There are many services that consultants provide, but the importance to the success or failure of a plan varies widely.  Establishing the right plan benchmark is critical, and it isn’t the ROA. We believe that it should be the plan’s specific liabilities. The investment structure and asset allocation that flows from a greater knowledge of the liabilities are key decisions that drive most of the plan’s subsequent return. However, it seems to us that most of the time (80/20 rule) is spent on trying to identify value-added managers. Get the wrong asset allocation and the best performing managers in the weakest asset class won’t help you much.

Let’s see if the industry can refocus on the importance of DB plans, so that we can stabilize the retirements for both our private and public workers.  As such, let’s begin to evaluate consulting firms that can improve the funded ratio and funded status, while minimizing contribution costs. These are the important metrics when evaluating a consulting firm and their consultants.  Experience matters in this industry.  We pay great homage to it on the asset management side of the business.  Why isn’t this as critical when evaluating asset consultants?  Remember: asset consultants have a greater impact on your plan than any individual manager does!