NewRetirement Retirement News Digest : Pensions

U.S. state pensions face overhaul in bad economy

jberman — Sat, 08 Aug 2009 07:45:00 GMT

Reuters, August 7th, 2009

When Illinois was facing at least $55 billion in unfunded pension liabilities back in March, Governor Pat Quinn outlined what he called "bold reform" for the state's retirement system.

In a move now being replicated in other cash-starved states, the governor proposed a two-tier system, leaving benefits for current workers untouched, but imposing changes such as a higher retirement age and capping cost-of-living increases on new employees.

That would allow the state to reduce its pension liability by $162 billion over the next 36 years, a substantial saving at a time when revenue is being decimated by the recession and the state is struggling to balance its budget.

Quinn's reform effort failed, but lawmakers agreed to create a pension system modernization task force charged with making recommendations by November.

Illinois is not alone in trying to reduce its huge liability.

The National Association of State Retirement Administrators found a nearly $443 billion collective unfunded liability for the 125 state, local government, and teacher pension funds in its most recent survey.

The situation is likely to worsen as the recession punches holes in budgets nationwide and causes big investment losses for defined-benefit pension plans that pay out a fixed income.

Survey finds few states ending retiree subsidies

jberman — Fri, 17 Jul 2009 09:13:00 GMT

MSN Money, July 16th, 2009

West Virginia may not have much company if it pursues ending health care subsidies for future public employees once they retire, a new survey suggests.

Just five states offer no subsidies to help their retirees afford coverage, according to previous research by the Center for State and Local Government Excellence. A survey released Wednesday by the Washington, D.C., group found that officials in 45 states consider it unlikely that they'll end future retiree coverage within the next five years.

West Virginia was the only state to indicate that it might. But officials in 17 states said they may move to limit subsidies for future retires, while three are weighing an end to subsidies for current retirees.

States are exploring such options in the face of a widening funding gap between on-hand assets and non-pension benefits promised to their employees. Accounting rules recently began to require government bodies to calculate these other post-employment benefits, or OPEB liabilities.

"There's this growing recognition that things cannot go on the way they have," said Jerrell Coggburn, one of the survey report's authors and chair of the Public Administration Department at North Carolina State University's School of Public and International Affairs.

Wednesday's survey puts the collective OPEB price tag at $558 billion, based on figures from 42 states that were calculated between 2005 and last year. West Virginia estimated a $7.7 billion liability in 2007.

But the totals gloss over the relative sizes of these unfunded liabilities, which range widely, cautioned report co-author Robert L. Clark, an economics professor at North Carolina State.

U.S. Insurer of Pensions Sees Flood of Red Ink

jberman — Sat, 23 May 2009 02:18:00 GMT

The New York Times, May 20th, 2009

The deficit at the federal agency that guarantees pensions for 44 million Americans tripled in the last six months to a record high, reaching $33.5 billion, largely as a result of surging bankruptcies among companies whose pensions it expects it will soon need to take over.

The agency, the Pension Benefit Guaranty Corporation, faced a shortfall of just $11 billion as of October. The combined effect of lower interest rates, losses on its investment portfolio and rising numbers of companies filing for bankruptcy produced the jump in its projected deficit, officials said Wednesday.

Because the agency has $56 billion in assets — most of which is invested in Treasury bonds — it is not facing any prospect of default in the short term, officials said.

“The P.B.G.C. has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums,” the agency’s acting director, Vince Snowbarger, testified Wednesday at a Senate hearing. “Nevertheless, over the long term, the deficit must be addressed.”

The financial troubles are just a small part of the challenges facing the pension agency, which was created by Congress in 1974 and today is responsible for pension programs covering 1.3 million people. It pays about 640,000 people actual benefits worth about $4.3 billion a year.

The P.B.G.C.’s former director, Charles E. F. Millard, was subpoenaed to testify at the hearing Wednesday. But he cited his constitutional right to avoid self-incrimination and declined to answer any questions.

Read more of this article.

Postmaster presses Congress to act on retiree bill

jberman — Sat, 09 May 2009 06:02:00 GMT

DM News - May 7th, 2009

In a letter to a key House subcommittee chairman, US Postmaster General John Potter again pressed his case for Congressional action on proposed legislation that would reduce the agency's out-of-pocket costs for retiree health benefits, which could save the US Postal Service $2 billion this year.

The proposed measure, HR 22, would allow the USPS to pay its share of contributions for retiree health benefits, estimated to be $2 billion this year, out of the Postal Service Retiree Health Benefits Fund. Annual payments to prefund health benefit costs for future retirees would still be made by the USPS.

The May 4 letter to Rep. Stephen Lynch, chairman of the House Subcommittee on Federal Workforce, Post Office, and the District of Columbia, seeks “prompt action on this much needed assistance.”

The bill, which has drawn 299 co-sponsors to date, was introduced in January and remains in the House subcommittee. The bill also is backed by the National Association of Letter Carriers and the American Postal Workers Union.

Protecting Retirement Accounts From Creditors

tsaleen — Mon, 06 Apr 2009 15:01:00 GMT

The New York Times - April 1, 2009

RETIREMENT accounts remain among many people’s most valuable assets, even at today’s depressed values. That means you need to protect them from creditors, a category that can include former spouses or people who have won lawsuits against you.

The asset protection strategies available to you depend on the type of account you have, where you live and whether you inherited the assets or amassed the funds yourself, among other factors.

You can start by understanding the exemptions in federal or state laws that may protect your retirement accounts. The good news is that most employer-sponsored plans, including 401(k)’s, are covered by the Employee Retirement Income Security Act, known as Erisa, and are completely protected from creditors — except when those creditors are former spouses or the I.R.S., said D. James Gehring, a lawyer with Seyfarth Shaw in Chicago.

The bad news is that individual retirement accounts are not covered by Erisa. If you have filed for bankruptcy, federal law protects up to $1 million in an I.R.A. that you contributed to directly, and protects the entire account balance if the money was rolled over into an I.R.A. from a company plan, said Jonathan E. Gopman, a lawyer with Cummings & Lockwood in Naples, Fla. So it’s important to keep careful records tracing the funds.

For anything short of bankruptcy, state law determines whether I.R.A.’s (including Roth I.R.A.’s) are shielded from creditors’ claims, Mr. Gopman said.

Most states, including New York, New Jersey and Connecticut, exempt 100 percent of the assets while they are in the account. But laws in other states vary widely on whether withdrawals are covered, whether protections extend to inheritors as well as the initial owner and whether former spouses can reach the funds.

Some states limit how much is exempt — Nevada caps it at $500,000 — while California and other states exempt only what is “reasonably necessary” to support the owner and her dependents. Such wording is, inevitably, an invitation to lawsuits.

In deciding whether, under California law, an I.R.A. can be attached by creditors, courts look at the owner’s age, earning ability and other assets, said Alex M. Brucker, a lawyer with Brucker Morra in Los Angeles. If someone had a $1 million company plan that was fully protected from creditors, a court might find that a $500,000 I.R.A. was more than what was reasonably necessary and thus should not receive the same protection, he said. And in some states, an innocent misstep could leave retirement assets vulnerable to creditors’ claims.

If, for example, you have been laid off or are retiring, rolling over assets from a qualified plan, like a 401(k), into an I.R.A. has estate-planning benefits. However, if you live in or are moving to a state where I.R.A.’s are not protected from creditors, you would be better off leaving the assets in the company plan, Mr. Gehring said. So you should consult a lawyer familiar with the rules of the state where you plan to live.

If you have at least $5,000 in the plan, the company must allow you to leave the money there until you are 65, but it is not required to let you take partial withdrawals or borrow against the account, Mr. Gehring said. “If the company goes bankrupt, your money is perfectly safe,” he said, because the business must keep retirement funds in a separate trust where its own creditors can’t reach them.

If you are leaving a company that has a cash-balance pension plan, you should resist the temptation to withdraw the money in a lump sum, Mr. Gehring said, unless you need the money to live on. Upon withdrawal, the money would be exposed to creditors’ claims, and you would have to pay income tax on the full amount.

As with money coming out of a 401(k), you can defer the income tax until you make withdrawals by rolling over the money into an I.R.A., but, again, your protection from creditors will depend on the state where you live.

For example, you might be returning to work after a period of unemployment and have rolled over an I.R.A. when you left your previous employer. Most companies will allow you to transfer that money directly into their plans as you come on board, Mr. Gehring said. You might want to do that either for asset protection or to take advantage of investment offerings. This strategy also works for people who are starting their own businesses and setting up 401(k)’s, Mr. Gopman said.

Note, however, that under federal law an I.R.A. that has been converted to a Roth I.R.A. cannot be rolled back into a company plan, Mr. Brucker said.

Be aware that state and federal laws against fraudulent conveyance prohibit transfers intended to hinder, delay or defraud creditors.

As a rule, such transfers must be in place before there is even a hint of potential trouble, said Gideon Rothschild, a lawyer with Moses & Singer in New York, to be sure they are protected.

If you plan to leave at least some of your I.R.A. to your family, remember that the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live.

But you can shield the assets by leaving an I.R.A. to a trust, Mr. Rothschild said. To do that, you must name the trust (which in turn benefits certain people) on the beneficiary designation form on file with the financial institution that holds your retirement account. You should be sure not to withdraw the money from the account and put it in a trust; that would make the money subject to income tax.

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Watercooler » 3 things to know about taxes for retirement

tsaleen — Mon, 23 Mar 2009 07:30:00 GMT

The Salt Lake Tribune - March 20, 2009

Here are three basic tax planning tips to keep in mind concerning retirement:

Withdrawals from 401(k)s are taxable income » They are taxed at your regular income tax rate once you retire. That can work out well if your rate is lower in retirement. It's important to realize that a good chunk of the amount you see in your 401(k) account will be going to the government unless you can take steps to offset your tax burden.

Consider a Roth IRA » Money withdrawn from traditional IRAs is taxable, while Roth IRAs grow tax-free, making them good retirement income. Roths also do not have an age maximum for contributions and don't entail required minimum distributions at age 70½. With a traditional IRA, you cannot contribute starting with the year you turn 70½.

Taxpayers with adjusted gross income higher than $100,000 can't convert to a Roth at the moment. But next year the income limit will be removed, making it an ideal time to convert if you haven't already.

Know what's taxable income in retirement » Some taxes in retirement are unavoidable, and retirees and near-retirees should get a handle on them.

Pension or annuity payments from a qualified employer retirement plan are taxable.

Social Security benefits may be fully or partially taxed, depending on your income level. They generally won't be completely tax-free unless they are your only income. For information see Internal Revenue Service Publication 915 on the IRS Web site at www.irs.gov, or get one by calling 800-TAX-FORM (800-829-3676).

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Retirement Accounts Have Now Lost $3.4 Trillion

tsaleen — Sat, 14 Mar 2009 18:49:00 GMT

US News & World Report - March 13, 2009

In October 2008, the Congressional Budget Office reported that stock market turmoil wiped out roughly $2 trillion of Americans' retirement savings over just 15 months. Since then, the stock market has continued to shudder and retirement savers have lost even more.

A new estimate found that retirement accounts, including 401(k)s and IRAs, have lost $3.4 trillion between September 30, 2007 and March 6, 2009. Assets in retirement accounts were valued at approximately $8.5 trillion on September 30, 2007 (expressed in constant 2009 dollars), according to calculations by Mauricio Soto, a research associate at the Urban Institute, but have since plunged 40 percent to $5.1 trillion. About 70 percent of these assets were invested in stocks. During the same period the stock market overall lost 56 percent of its value, a decline of about $13 trillion.

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AN UPDATE ON 40i(k) PLANS:INSIGHTS FROM THE 2007 SCF

tsaleen — Wed, 04 Mar 2009 02:25:00 GMT

Center for Retirement Research at Boston College - March 3, 2009

Introduction

The maturation of the 401(k) system and the enactment of the Pension Protection Act of 2006, which made 401(k) plans easier and more automatic, were expected to enhance the role that 401(k)s played in the provision of retirement income. So, originally, the release of the Federal Reserve’s 2007 Survey of Consumer Finances (SCF) seemed like a great opportunity to reassess 401(k)s. The SCF is a triennial survey of a nationally representative sample of U.S. households, which collects detailed information on households’ assets, liabilities, and demographic characteristics.1

Of course, the 2007 SCF reflects a world that no longer exists. Interviews were conducted during the late summer and early fall when the Dow Jones was at 14,000 (the peak was October 9, 2007) and housing prices were only slightly off their peak. While the economic crisis had already begun, its effects were not yet visible.2 Since the time of the interviews, the stock market has imploded, reducing the value of equities in 401(k)s and IRAs by about $2 trillion. Housing prices have fallen by 20 percent. And the crisis has spread to the real economy, throwing 3.6 million people out of work.3

Given the collapse of the financial markets and the economy, this Issue in Brief uses the 2007 SCF data as a starting point in evaluating the condition of 401(k)s and relies on more recent data and estimates to paint a full and current picture. The brief proceeds as follows. The first section describes the evolution of 401(k) plans and how the Pension Protection Act of 2006 would be expected to improve the performance of these plans. The second section uses data from the 2007 SCF and other sources to update previous findings on participation, contribution levels, investments, and withdrawals. The third section then projects how the events of 2008 have affected various aspects of 401(k) plans. The final section concludes that whereas 401(k) plans were showing some improvement in 2007, the events of 2008 highlight their limitations in serving as the only supplement to Social Security.

The Evolution of 401(k) Plans

The advent of 401(k) plans is still relatively recent.

Twenty-five years ago, defined benefit plans (together with certain types of traditional defined contribution pension plans – such as employer-funded profit-sharing plans and money purchase plans) were workers’ primary source of private pension coverage. These plans require workers to make almost no important financial choices before retirement. The firm enrolls all eligible workers, makes contributions, makes investment decisions (or retains professional investment managers), and generally provides a lifetime benefit at retirement. The worker’s only real choice is when to collect benefits.

When 401(k) plans began to spread rapidly in the early 1980s, they were viewed mainly as supplements to employer-funded pension and profit-sharing plans. Since 401(k) participants were presumed to have their basic retirement income security needs covered by an employer-funded plan and Social Security, they were given substantial discretion over 401(k) choices, including whether to participate, how much to contribute, how to invest, and when and in what form to withdraw the funds.

Over the past 25 years, the pension landscape has remained remarkably unchanged in one respect. Less than half of private sector workers – at any moment in time – are participating in any form of employer-sponsored plan (see Figure 1). Since median job tenure for those 25 years and older is only 5 years, many workers will move in and out of coverage.4 As a result, more than half of the workforce will end up with some pension accumulations at retirement, but many will find it difficult to ensure continuous coverage.

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Hidden Pension Fiasco May Foment Another $1 Trillion Bailout

tsaleen — Wed, 04 Mar 2009 02:20:00 GMT

Bloomberg - March 3, 2009

The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent.

The CTA, which manages the second-largest public transit system in the U.S., had to hope for a huge contribution from the Illinois state legislature. That wasn’t going to happen.

Then the authority found an answer.

“We’ve identified the problem and a solution,” said CTA Chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.

A year later, it asked Illinois Auditor General William Holland to research its plan. The state hired an actuary, did a study and, on July 17, concluded that the sale of bonds would most likely result in a loss of taxpayers’ money.

Thirteen days after that, the CTA ignored the warning and issued $1.9 billion in bonds. Before the year ended, the pension fund was paying out more to bondholders than it was earning on its new influx of money. Instead of closing its funding gap, the CTA was falling further behind.

Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.

The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.

30 Percent Shortfall

The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.

With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.

That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show.

The quick fix for pension funds becomes a future albatross for taxpayers.

In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent -- 70 percent less than what the fund was paying for the loan.

The public gets nothing from pension bonds -- other than a chance to at least temporarily avoid paying for higher pension fund contributions. Pension bonds portend the possibility of steep tax increases.

‘Very Risky’

By law, states must guarantee public pension fund debts.

“What appears to be a riskless strategy is actually very risky,” says David Zion, director of accounting research for New York-based Credit Suisse Holdings USA Inc. “If the returns on the pension bond-financed assets don’t exceed the cost of servicing the debt, the taxpayers bear the brunt.”

With the recession that started in December 2007, cities and states are running huge deficits, which they’re closing by cutting services and firing employees. The economic downturn gives state legislatures another reason to cut back on funding pensions.

Government retirement plans nationwide don’t calculate their shortfalls based on market values of their assets and liabilities, says Orin Kramer, chairman of the New Jersey State Investment Council, which oversees that state’s pension fund.

Paper Over Losses

Fund accountants resort to a grab bag of tricks to get by. They set unrealistically high expected rates of return to reduce governments’ annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners.

Accountants do that by averaging gains and losses, usually over a five-year period -- sometimes for as long as 15 years of investment returns.

That means actual results of any one year aren’t used to calculate how much a state legislature contributes, which can delay governments catching up with losses for more than a decade.

This ruse can pass the buck to future taxpayers, who will pay for the retirement benefits of today’s government workers.

“There are accounting gimmicks in pension land which create economic fictions and which disguise the severity of the real problem,” Kramer says. “Unfortunately, pension board members don’t have much of an appetite for disclosing inconvenient truths.”

Calpers’ Numbers

The Teacher Retirement System of Texas, the seventh-largest public pension fund in the U.S., reports each year that its expected rate of return is 8 percent. Public records show the fund has had an average return of 2.6 percent during the past 10 years.

The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley.

Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.

‘It’s Pitiful’

“It’s pitiful, isn’t it?” says Frederick “Shad” Rowe, a member of the Texas Pension Review Board, which monitors state and local government pension funds. “My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time.”

Rowe, 62, is chairman of Greenbrier Partners, a private investment firm he founded in Dallas 24 years ago.

Texas teacher retirement fund spokesman Howard Goldman and Calpers’s McKinley declined to comment on Rowe’s views.

Most public pension funds, like the one in Chicago, were already treading water before the 2008 stock market crash. Now they’re closer to sinking.

State government pension fund assets in the U.S. fell 30 percent in the 14 months ended on Dec. 16, losing $900 billion, according to the Center for Retirement Research.

Fund managers don’t have many options for increasing assets. They need adequate funding from state legislatures, which in many cases they don’t get. Beyond that, they’re at the mercy of financial markets.

Easy Money

Typically, public pension funds put 60 percent of their assets in stocks, 30 percent in fixed income, 5 percent in real estate and the rest in riskier investments such as hedge funds and commodities.

That mix requires the nonbond assets to earn double-digit gains in order to reach expected rates of return.

The easiest way for retirement plans to increase cash is to issue pension obligation bonds. For the funds, that means borrowing money at no risk -- because the bonds are backed by taxpayers.

A government retirement plan can’t go bankrupt, even if it’s insolvent; state treasuries must put up the money if a fund runs dry.

What for retirement plans in the U.S. has been a simple solution -- issuing $50 billion in pension bonds --has become a growing headache for the public.

‘Where Did The Money Go?’

“When the actuary is finished with his magic, where did the money go?” asks Jeremy Gold, who was one of the first actuaries to work for a Wall Street firm when he joined Morgan Stanley in 1985.

The answer, he says, is that future taxpayers may cover what fund administrators had hoped to get from investment returns.

For investors, these debt sales are similar to ordinary municipal bonds. Because both forms of debt are ultimately backed by taxpayers, credit rating firms give them high grades for safety. The difference for bondholders in states is that pension bonds aren’t tax-exempt.

General obligation bonds are typically used to pay for construction of schools, hospitals and other public works; pension bonds just fund needy retirement plans. For that reason, Congress decided in 1986 that pension bond income should be subject to federal income taxes.

Government officials say they issue pension bonds believing that their fund managers can earn more money from investing the proceeds than what they have to spend in interest payments to bondholders.

‘Risk Is Minimal’

The government of Puerto Rico borrowed $2.9 billion through pension bonds in 2008, betting that it could reap annual returns of 8.5 percent investing the money, while paying its bondholders 6.5 percent.

“The risk is minimal,” says Jorge Irizarry, who was chairman of the Employees Retirement System of Puerto Rico from August 2007 through December 2008.

A political appointee, he departed after his party lost the governorship in November. Before working for Puerto Rico, Irizarry was an executive on the island at PaineWebber Group Inc., now UBS Puerto Rico, from 1986 to 1998.

So far, Puerto Rico’s wager isn’t paying off. The 8.5 percent expected rate of return has instead been a loss of more than $200 million, according to a Dec. 12 presentation by fund administrators to legislators.

‘Turned Against Us’

“It was an arbitrage transaction, and the market has turned against us,” says Carlos Garcia, former president of Banco Santander Puerto Rico, who replaced Irizarry as chairman of the pension fund in January. “I don’t know if the benefits intended will be realized.”

Actuaries consistently permit public pension funds to report artificially high expected rates of return -- most often 8 percent and as much as 8.75 percent. That’s more than the 6.9 percent billionaire investor Warren Buffett sets for his Omaha, Nebraska-based Berkshire Hathaway Inc.’s pension fund.

“Public pension promises are huge and, in many cases, funding is woefully inadequate,” Buffett wrote in his 2008 letter to shareholders. “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”

Determining how much expected rates of return should be isn’t complicated, says Rowe, who oversees Texas pension funds.

“Why do they choose high expected rates of return?” he says. “The only reason is to sneak through promising a lot to pensioners -- which means worrying about it later. It’s madness.”

The Rules

The Governmental Accounting Standards Board, a nonprofit group that provides guidance for accountants, has rules for financial reporting by public pension funds.

A study commissioned by the U.S. Senate Finance Committee, released on July 10, 2008, found that GASB guidelines could be meaningless.

“GASB operates independently and has no authority to enforce the use of its standards,” the report said. Each state sets its own rules. The GASB rules don’t mention pension bonds.

Illinois sold the largest pension bond issue ever, $10 billion in 2003, to shore up its state pension funds. In 2007, former Governor Rod Blagojevich proposed an even larger, $16 billion pension bond issue, as the state’s unfunded pension liability exceeded $40 billion.

The legislature impeached Blagojevich in January after he allegedly sought bribes in return for filling President Barack Obama’s vacant U.S. Senate seat.

Ignoring Advice

When the Chicago Transit Authority decided to issue debt in 2008, it did its own calculations.

The CTA concluded it could borrow $1.9 billion, paying an interest rate of 6 percent to bondholders, and invest the proceeds to receive its expected rate of return of 8.75 percent. Such an annual return would add $52 million a year to bolster the fund.

The CTA chose to ignore not only Illinois’s auditor general but also its own actuarial firm, Detroit-based Gabriel Roeder Smith & Co. The company had determined there was just a 30 percent chance of earning 8.75 percent.

“We executed the best transaction we could, given the legislative and political restraints,” says CTA Chairman Brown, who is also co-head of municipal finance at Chicago-based Mesirow Financial Inc.

Credit Crunch

Since the bond sale, the authority has held the money as cash, earning 2 percent. And, with the credit crunch forcing municipal bond interest rates up to attract buyers, the CTA wasn’t able to sell bonds with a 6 percent return.

A team of underwriters, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, sold the CTA bonds in August 2008, at a yield of 6.8 percent, so the fund had to pay bondholders more than it had expected.

“There is negative arbitrage,” Brown says. “It’s better than having dumped the money into the equity market.”

The one group that benefits from the pension bond sales is the CTA’s retirement plan members. The authority is responsible for contributing more than twice as much to the fund as its employees. Thus the retirees are virtually certain to enjoy pension contribution savings from the pension bonds, the auditor general’s report says.

Puerto Rico Mistakes

Neither workers nor the government are thrilled with the public pension system in Puerto Rico. As of 2005, the Caribbean island’s government pension, with 278,000 participants, had assets that totaled just 19 percent of its long-term liabilities. That made it less funded than any state retirement fund in the U.S., public records show.

Puerto Rico’s pension system is a model for common mistakes made by public funds across the U.S.

Puerto Rico, a U.S. commonwealth with a population of 4 million, has underfunded its main public pension fund since 1951 to save cash.

The island, whose capital building in Old San Juan is as close to the turquoise ocean waves as are the tourists taking photos on the edge of the beach, is far from being a financial paradise.

The legislature has repeatedly ignored annual suggested contributions calculated by its own actuaries, according to the Employees Retirement System’s records.

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Retirement Saving Plans for Workers at Risk

tsaleen — Fri, 27 Feb 2009 07:46:00 GMT

The Wall Street Journal - February 26, 2009

Small businesses are having a harder time meeting their obligations in offering retirement benefits for their employees, with two stark choices facing them: shut their doors or end their contributions, according to testimony at yesterday’s hearing before the House Committee on Small Business.

“Even before the economic downturn there was concern that small employers could not offer retirement plans at the same level as large corporations,” said Rep. Nydia Velazquez, D-N.Y., chairwoman of the House Small Business Committee, in a statement. “With consumer spending at an all-time low, and credit difficult to access, many small firms find it impossible to make up the difference for retirement plans hit hard by the stock market’s losses.”

Consider the facts: In the past 18 months, more than $2 trillion in retirement savings has been lost because of the stock market’s downturn. 401(k) plans have dropped more than 20% in value in the past year. In addition, 56% of workers are less confident in their ability to achieve a financially secure retirement than 12 months ago, with about a third expecting to work longer and retire at an older age, according to a recent survey by the Transamerica Center for Retirement Studies.

“In the current economic environment, it is more important than ever that Congress focus on encouraging the implementation and maintenance of retirement plans by small business,” says Jason Speer, vice president and general manager of Quality Float Works Inc. of Schaumburg, Ill., and a fourth-generation manufacturer.

Witnesses urged the Committee to look into these solutions:

- Consider measures to cap the amount of losses employers are responsible for covering during market downturns.

- Encourage unlimited pre-funding of defined benefit plans during “good” times so that there is less strain during the “bad” times.

- Make employee IRAs mandatory.

- Raise the age for required minimum distributions from 70.5 to 75, since many people are working longer.

- Create an annual tax credit to reward small employers that continue to maintain retirement plans and contribute to the plans.

Ranking Member Sam Graves, R-Mo., says that only 30% of small firms offer a pension plan, according to a National Federation of Independent Business survey, even though small companies represent 99% of all employers in the U.S. “We must work towards educating American workers on the necessity of retirement saving and helping, not by mandating small businesses to provide employees with retirement benefit plans,” Mr. Graves said in a statement.

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House 401(k) Hearing: 4 Ways to Fix the Retirement System

tsaleen — Thu, 26 Feb 2009 16:11:00 GMT

US News & World Report - February 24, 2009

The House Education and Labor Committee held a hearing today to examine the shortcomings of the U.S. retirement system. The two-and-a-half hour discussion largely highlighted the weaknesses of the current 401(k) retirement savings system. “For too many Americans, 401(k) plans have become little more than a high stakes crap shoot. If you didn’t take your retirement savings out of the market before the crash, you are likely to take years to recoup your losses, if at all,” said Chairman George Miller, a California Democrat, in an opening statement. “As a result, we are realizing that Wall Street’s guarantees of predictable benefits and peace of mind throughout retirement was nothing more than a hallow promise.”

Four invited retirement experts also offered their ideas to fix the retirement system. Excerpts:

John Bogle, founder of Vanguard Group:

“I envision the creation of an independent Federal Retirement Board to oversee both the employer-sponsors and the plan providers, assuring that the interests of plan participants are the first priority. This new system would remain in the private sector (as today), with asset managers and record keepers competing in costs and in services.”

Dean Baker, co-director of the Center for Economic and Policy Research:

Allow “workers the option to contribute to a government run pension system that would provide a modest guaranteed rate of return. The system would be a universal system like Social Security, however it would be voluntary. To try to maintain high rates of enrollment, there can be a default contribution from all workers of 3 percent, up to a modest level, such as $1,000 a year. Workers could be allowed to contribute some additional amount, for example an additional $1,000 per year, that would also earn them the same guaranteed rate of return. The system should also be structured to encourage workers to take their payouts in the form of annuities, except in the case of life threatening illness. For example, a nationwide system could easily offer free annuitization, while charging a modest penalty, perhaps 10 percent, to workers who take their money out of the account in a lump sum… At a 3 percent rate of return, a worker who saved $1,000 a year for 35 years would be able to get an annuity of $4,200 a year at age 65… This can be done at no cost to taxpayers, simply by having the government assume market risk by averaging returns over time.”

Paul Schott Stevens, president and CEO of the Investment Company Institute:

“Congress should not mandate specific investment options or distribution methods or attempt to regulate exposure to investment risk. Nor should Congress undermine the ability of plans to pay for services using asset-based fees…Congress should reject attempts to scrap or undermine the existing system or fundamentally alter its structure.”

Alicia Munnell, director of Boston College’s Center for Retirement Research:

“We also need to consider a new tier of retirement income… The goal of this additional tier would be to replace about 20 percent of pre-retirement income. To accomplish the goal, participation should be mandatory, participants should have no access to money before retirement, and benefits should be paid as annuities. The system should be funded and reside as much as possible in the private sector.”

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Senate Weighing New Rules for Retirement Funds

tsaleen — Mon, 23 Feb 2009 03:39:00 GMT

The Washington Post - February 22, 2009

Target-date retirement funds are coming under increased scrutiny as investors try to contain the damage to their 401(k)s from the worst economic downturn in generations.

The funds, also known as lifecycle funds, are designed to minimize risk by shifting the funds' assets from equities to bonds as investors grow older. But with their increasing popularity, target funds are also leaving some investors confused about their makeup and about their level of risk. Other investors may not even realize their retirement plan has invested in the funds.

The Senate's Special Committee on Aging is expected to ask the Department of Labor tomorrow to establish regulations governing the composition and advertising of target funds. It is also planning to request that the Securities and Exchange Commission look into similar concerns.

"Last year, too many 2010 target-date funds reported astounding losses, considering their participants were on the brink of retirement," said Sen. Herb Kohl (D-Wis.), chairman of the committee. "It's clear that a number of these companies need to reassess their definition of 'conservative.' "

Under the Pension Protection Act of 2006, companies were able to set target funds as the default option for employees who did not select a plan for their 401(k). Previously, companies could only roll those workers into conservative money market or so-called stable value funds.

That drove a boom in target funds' popularity just as the stock market began to falter. According to a report this month by consulting firm Greenwich Associates, the percentage of retirement plan sponsors that used money market or stable value funds dropped to 19 percent last year from 35 percent in 2007. Plan sponsors that used target funds jumped to 53 percent last year from 35 percent the year before.

Many investors believe choosing a target fund eliminates the need to actively manage their 401(k) because the assets shift automatically over time, said Dean Baker, co-director of the Center for Economic and Policy Research, a think tank. And that can lull investors into complacency, he said.

"They give people a sense of security that probably isn't warranted," Baker said. "They still can be taking on a lot of risk."

Even though the funds were designed to limit aging workers' exposure to stocks, some are still invested heavily in the markets as a worker approaches retirement.

An analysis by the committee found that some target funds were made up of as much as 66 percent equities and as little as 31 percent bonds. Performance was just as varied. The DWS Target Fund 2010 fell just 3.6 percent, besting the market. Meanwhile, the Oppenheimer Transition 2010 dropped 41.3 percent.

The S&P Target Date 2010 Index Fund, which helps investors benchmark their funds' performance, lost 17 percent in 2008. The fund is about 60 percent bonds and fixed-income securities, while the remaining 40 percent is invested mainly in equities.

"There is an extraordinary amount of heterogeneity as you got closer and closer to the target date," said Dallas Salisbury, chief executive of the nonprofit Employee Benefits Research Institute.

Target funds are on the agenda of a hearing the committee on aging will hold Wednesday looking into the impact of the financial crisis on the ability of baby boomers to retire. Falling home prices have wiped out many investors' nest eggs. According to the S&P/Case-Shiller Home Price Index, home values in 20 of the country's largest markets fell 18 percent in November from a year ago, the latest data available. The stock market has fared even worse, with the Dow Jones industrial average dropping about 41 percent over the past year.

Glen Buco, president of West Financial Services in McLean, said he sometimes recommends that clients choose target funds that mature at a different date than they actually plan to retire, allowing them some control over how aggressive their fund is. If they want to take on more risk, they should choose a fund that targets a date after their retirement. If they are conservative, they should opt for one that matures before that date.

In some cases, investors want a higher risk level in a target fund. Some funds may still be invested heavily in the markets -- despite nearing maturity -- to help ensure a large enough return for the money to last through retirement years. Rod Bare, director of asset allocation strategy at Morningstar, said that investors also have varying appetites for risk. Some may be using their target funds as bequests and want a more aggressive investment plan. Others may be relying on the fund as their retirement income and would rather play it safe. Morningstar recently established new target fund indexes, each in three risk profiles, to help investors better gauge the performance and composition of their funds.

"There is a certain amount of investor diversity out there that is healthy and normal and appropriate," Bare said.

Still, there is widespread agreement that investors should adjust their assets to a more conservative mix as they near retirement. Though target funds can help with that effort, experts say that investors cannot escape keeping an eye on their funds.

"Just because it's a prudent selection on the day you pick it doesn't mean you don't have to monitor it," said Jack Vanderhei, research director at the Employment Benefits Research Council.

Investors can get a sense of the future composition of their funds by looking at those close to maturity, Buco said. But he cautioned that allocation strategies could change and that letting someone else manage your retirement entirely is never a good idea.

"If they were all the same, fine," he said. "But they're not, and that's the issue."

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The Horror of Examining a 401(k) Balance

tsaleen — Sun, 25 Jan 2009 04:53:00 GMT

The New York Times - January 24, 2009

In recent months, one particular event has instilled fear and even panic in households across the nation: the arrival of the 401(k) statement. Those who can bring themselves to open the envelope or click on the e-mail version are often stricken by columns of minus signs and descending numbers.

What is worse, the people with the largest account balances have experienced the most severe losses. Many of these people are older and have the fewest years until retirement to make up the difference.

As always, though, it is important to put the numbers in perspective. According to the Employee Benefit Research Institute, people with more than $200,000 in their accounts have still managed an average increase of 161 percent in their balance since 2000.

This number reflects not only the return on investment but also the value of the employee’s contribution — proof that putting money aside for retirement, paycheck after paycheck, is still a wise idea.

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Missouri retirement system lost $3.5M to scam

tsaleen — Mon, 19 Jan 2009 17:54:00 GMT

Forbes - January 16, 2009

Missouri's treasurer says the state's retirement account is among thousands of investors and financial institutions entangled in an investment scheme.

Bernard Madoff, the former chairman of the Nasdaq Stock Market (nasdaq: NDAQ - news - people ), confessed last month to taking $50 billion in a Ponzi scheme.

Missouri Treasurer Clint Zweifel said Friday that includes $3.5 million from the Missouri State Employee Retirement System. Those funds were place with Seattle-based Silver Creek Capital Management, which then invested the money with Madoff.

Zweifel, who sits on the retirement system board, called Friday for a detailed review to check for additional exposure to Madoff's scheme.

The retirement systems' executive director, Gary Findlay, said the link to Madoff and lost funds were discovered late Monday. Findlay said the retirement system has already checked for exposure but that fraud is difficult to spot.

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401(k) match cut? No need to stop saving

tsaleen — Mon, 12 Jan 2009 16:33:00 GMT

Chicago Tribune - January 11, 2009

With more companies cutting their retirement plan matches and implementing pay freezes, 2009 is shaping up to be a bad year for the nest egg.

The Pension Rights Center counted about 20 major corporations in December that publicly announced changes (mostly negative) to their 401(k) matches. Many others have discontinued or downsized their traditional pension plans or announced salary freezes, experts said.

At least to this point, however, savers don't seem to be bailing out.

Just 3 percent of 401(k) plan savers stopped their contributions in 2008, according to a survey of plan administrators by the Investment Company Institute, a mutual fund industry association. The survey covered administrators representing 22 million retirement-account holders.
Contribution rates to 401(k) plans dropped by less than half of 1 percentage point, according to a separate study by Hewitt Associates, a Lincolnshire-based benefits consulting firm.

Hardship withdrawals are up, according to Hewitt, but, overall, the surveys failed to detect an investor stampede away from workplace retirement plans.

So what can investors do if they want to keep a retirement-savings game plan going?

Calculate any loss. Most employer-matching contributions amount to a few thousand dollars a year at most—significant but not enough that their absence will break a retirement plan, said Morris Armstrong, a financial planner with Armstrong Financial Strategies.

"Losing the match is not going to be the end of the world, particularly for people who are over 50" and have accumulated the bulk of their retirement savings, Armstrong said.

Financial planners often consider the company match free money that makes the case for saving in a 401(k) before an individual retirement account.

Losing that money should be cause for re-evaluating whether you would be better off saving in an IRA, particularly for people in workplace plans that charge relatively higher fees or offer less-desirable investment options. Keep in mind that you can generally sock away more money in a 401(k) than in an IRA, however, and your IRA contributions can lose their tax deductibility depending on your tax status and coverage in an employer plan.

Budget it into savings. If you have some slack in your budget, it would be ideal to make up for the shortfall from discontinued matching funds with additional savings.

Armstrong encourages clients to redouble their efforts to create a meaningful budget that will help make up for paychecks that don't stretch as far as they used to and for any missing match money. Or you could pick a specific percentage goal, say cutting 15 percent out of last year's expenses, he said.

Add to taxable accounts. Losing an employer match in a tax-deferred account is painful, but a lot of savers are so enamored by the deductions that they neglect saving long-term money in regular, non-retirement accounts as well.

"You're going to want assets in retirement that you don't owe taxes on," Armstrong said, so consider taking an amount equal to your lost 2009 match, if you can muster it, and socking it away in the emergency fund.

Remember other deductions. Don't overlook legitimate deductions that can decrease your tax bite. Armstrong encourages clients to use flexible spending accounts, for example, to lower adjusted gross income as much as possible, an area some affluent clients haven't bothered with in the past, but that might be helpful when they are trying to boost savings any way they can.

He's less enthusiastic about deferred-compensation plans offered at some workplaces, however, because the funds aren't guaranteed, a risky prospect in an uncertain economy.

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