Tag Archives: Retirement

06.10.14
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Where are the Economies of Scale?

Since its founding in August 2011, KCS has tried to highlight some of the issues facing the US retirement industry in the hopes that perhaps best practices could be identified and DB plans, as a result, SAVED.  I recently came across the “Status Report on Local Government Pension Plans” for Pennsylvania.  The report was released in December 2012, and it used information through calendar year 2011.

The following paragraph jumped out at me:

“Pennsylvania’s local government pension plans comprise more than 25 percent of the public employee
pension plans in the United States. There are now more than 3,200 local government pension plans in
Pennsylvania, and the number is continuing to grow. Seventy percent of the local government pension plans
are self-insured, defined benefit plans, and 30 percent are money purchase or other type plans. The pension
plans range in size from one to more than 18,000 active members, but more than 98 percent of the pension
plans can be characterized as small (less than 100 members). While 68 percent of the local government
pension plans have ten or fewer members, 32 percent have three or fewer active members.”

I find it hard to believe that anyone thinks that having more than 3,200 local government plans in PA is a good idea, especially when one considers that 98% of the plans have fewer than 100 employees. The local governments and their participants would be much better off pooling their resources into larger, more professionally managed DB plans that afford everyone the benefit or economies of scale. 

I suspect that there exist other states in the Union with a similar governance structure, but if we are to preserve the defined benefit plan as the retirement vehicle of choice, we need to reduce the cost of managing these plans.  Allowing thousands of defined benefit plans with fewer than 100 participants to exist is not sound governance.

05.03.14
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What are you paying for?

A reflection:

I was very fortunate to be hired into the investment industry in 1981. Two gentlemen, Larry Zielinski and Ted Swedock, took a huge leap hiring a not very qualified candidate out of undergraduate business school to fill a role as an analyst in a small consulting group.  I was the first-non consultant or assistant to be hired.  The role’s responsibilities were vast, and the experience that I gained was immeasurable.

But, the most important knowledge that was shared with me was a comment that Larry made on the first day that I began working at Janney Montgomery Scott’s Investment Management Controls division.  Larry told me that anyone or any company can produce vast quantities of paper and/or fancy reports.  A consultant is only worth their salt if they have the ability to interpret the information that they are passing on and at the same time are willing to make recommendations based on their interpretation.

As I sit back today and reflect on my nearly 33 years in this business, I can’t help but remember how important those words were that Larry uttered to me in October 1981.  I’ve tried to follow his lead since day one.  Initially, I didn’t have a clue about how most things truly worked in the investment industry. Today, as we build KCS, we continue to live by Larry’s example.  We can produce all the fancy reports in the world, but they aren’t worth the paper they are printed on if we also don’t share with our clients and prospects our recommendations as to a course that they should follow.  We are Fiduciaries, and we take that responsibility seriously.

As you may know, every month we produce at least one article on an investment subject. We don’t pull any punches.  If you want to know how we feel on a subject, just go to our website and look under the heading “Publications.”  Everything that we’ve produced is there.  I don’t know how many other consultants/consulting firms are regularly producing articles, but they should at least be willing to take a stand on those subjects most important to their clients.

At KCS, we are concerned about retirement security for most Americans.  We do believe that the demise of the defined benefit plan will produce negative economic and social consequences for a large segment of our population.   We don’t think that the status quo approach to managing DB plans is working.  We believe that our clients and their beneficiaries need new thinking and approaches on a variety of retirement subjects.  We’ve articulated those.  Has your consultant? So, I ask again, are you getting what you are paying for?

04.24.14
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When everyone expects one thing, you may want to prepare for a different outcome

On January 9th, and again on April 4th, we at KCS addressed the issue that US interest rates wouldn’t necessarily rise, and in fact, with everyone in the world seemingly believing that interest rates had only one way to move – UP – we thought that there was a good chance that rates might fall.  In fact, the interest rate on the 10 year US Treasury has fallen by more than 30 bps so far this year.  That is a fairly meaningful move.  With many plan sponsors and asset consultants trimming, eliminating, and restructuring their US fixed income exposure, a plan’s asset allocation is now more disconnected from the liabilities than before.  This disconnect exacerbates the volatility in funded ratios and contribution costs. 

Don’t believe us, then how about the following.  Here is a brief research piece that I found on Cullen Roche’s website today.

“Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury  yield to rise in the next six months.

The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.”

Read more at http://pragcap.com/the-metamorphosis-of-the-bond-bears#6KE3VCCCBLDYV554.99

The US Retirement industry cannot afford to get the direction of rates wrong.  A continuation in the decline of rates will only further inflate the underfunding of US pension liabilities, and continue to put pressure on both private and public DB plan sponsors to do something else, such as close or freeze the DB plan and move more participants into DC.  At KCS, we’ve spoken and written about alternative strategies that go along way to improving funded ratios and stabilize contribution costs.  We are waiting to hear form you.

The beneficiaries of our collective effort cannot afford to have us screw up any more. DC plans are not the answer, but are quickly becoming the only game in town.

 

“Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury  yield to rise in the next six months.

The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.”

Read more at http://pragcap.com/the-metamorphosis-of-the-bond-bears#6KE3VCCCBLDYV554.99

“Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury  yield to rise in the next six months.

The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.”

Read more at http://pragcap.com/the-metamorphosis-of-the-bond-bears#6KE3VCCCBLDYV554.99

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.

04.07.14
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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.


 
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.

01.06.14
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KCS’s January 2014 Fireside Chat: 2013 – A Year In Review

KCS’s January 2014 Fireside Chat: 2013 – A Year In Review

“My role in society, or any artist’s or poet’s role, is to try and express what we all feel. Not to tell people how to feel. Not as a preacher, not as a leader, but as a reflection of us all.” (John Lennon) 

 

As we gaze back on 2013, as we do following any year, we reflect on both the positives and negatives that impact our lives, our families, friends and colleagues, our community, our industry, our country and the world. We wonder why these events occur, why we may or may not have been involved, and whether or not there was anything that we could have done to alter the outcome through our collective experience. (please click on the link to continue to read the latest FC)