Author: Ted Ballantine

An increasing number of states are in the process of legislating auto-IRAs for employees of small businesses that are not automatically offered a pension plan or 401(k).

Backed by large groups such as AARP, these measures could help secure retirement for over 55 million Americans, or almost half of the workforce in the country.

But there is push-back too, from two notable places: employers and financial service firms.

But it is not currently getting the reception it needs to succeed. As explained by CBS News:

Yet as these bills wind their way through statehouses, they’re also getting major pushback from financial service firms because the auto-IRAs would typically be invested by state-administered agencies that might compete with private-sector retirement plan vendors and investment managers. Employers, which would be required to deduct the contributions from their employees’ paychecks and forward them to the state, are also expressing concerns about that role.

The American Council of Life Insurers has been the biggest and most vocal opponent. But in California, the Securities Industry and Financial Markets Association is part of a group of 36 trade and business organizations led by the California Chamber of Commerce that’s opposing a proposed auto-IRA. They want it amended to address a variety of concerns, including potential employer liability, said Marti Fisher, the Chamber’s policy advocate.

If passed, auto-IRAs will give employees the opportunity to opt-in or opt-out. “Some might opt out,” conceded Senator Daniel Biss of Illinois, the main proponent of that state’s plan. But of those who stay in, he believes “very, very few will be disappointed about their decision 10 years later” when they’re “surprised to have the beginnings of a nest egg,” he told CBS.

Seventy-one percent of surveyed voters in New Jersey say they’ll vote in favor of the constitutional amendment that will force the state to contribute to its public pension system, according to a Monmouth University Poll.

However, the poll also indicates that support wanes significantly when taking into account the possible peripheral effects of the amendment — namely, decreased funding for other state services.

According to NJ.com:

“At first glance there appears to be widespread support for constitutionally guaranteeing that the full pension obligation is met in each annual budget,” said Patrick Murray, director of the independent Monmouth University Polling Institute.

“However, it is not clear that voters really comprehend that approving this measure would mean pension payments would automatically take precedence over funding other key services.”

Given the choice, voters said they’d rather fully fund the school aid formula than pensions. A quarter preferred to make the full pension payment, compared with 63 percent who want to fund schools.

Fifty-nine percent would support fully funding roads and bridges, and 30 percent would spend the money on pensions.

The proposed measure — which would amend the New Jersey constitution to require an annual pension contribution from the state — will be on the ballot in November.

New Jersey has a troubled history of making full pension contributions.

In what is considered to be the biggest pension overhaul in the country since 1999, Poland announced its plans to dismantle its privately-owned pension fund system and transfer $35 billion worth of assets to individual retirement accounts, a quarter of which will be managed by a state entity.

While the decision cannot be called nationalization, especially after a Supreme Court ruling deemed pension-fund assets to be public, the proposal will still entail a partial government takeover.

Bloomberg explained:

“It’s not the worst-case scenario we feared and doesn’t imply an immediate sell-off,” Marcin Gatarz, head of equity research at Pekao Investment Banking brokerage in Warsaw, said in a note. “While this doesn’t envisage the state gobbling up a big chunk of assets, uncertainty remains as the plan may change. That should keep Polish stock valuations lower.”

The revamp risks worsening concern over state interference in the economy after the Law & Justice party, which has pledged to spur growth and distribute wealth more evenly, won elections eight months ago. A standoff with the European Union over democratic standards prompted the country’s first-ever credit rating downgrade and spooked investors. Foreign owners of the pension funds targeted by authorities include Allianz SE, MetLife Inc. and Nationale-Nederlanden NV.

But Deputy Prime Minsuter Mateusz Morawiecki said privately-owned pension funds have not been performing efficiently. “Private pension funds haven’t worked out, the system isn’t serving anyone, doesn’t provide higher pensions and has failed to support growth,” he said.

Putting the state at the forefront of a national effort to help manage a retirement issue that concerns millions of Americans, Maryland passed legislation that will come into law on Friday to give employees with no retirement savings options state-sponsored and private alternatives.

The new bill will give employees who do not have a 401(k) plan an option to contribute to a retirement savings account.

The Brookings Institute reports that there are 52 percent of these employees in companies with 50 to 99 employees, and 80 percent of them in companies with less than 10 employees. In Maryland, there is an estimated million of them.

The Baltimore Sun explained:

“This is kind of trying to head off a crisis that we see coming,” said Del. C. William Frick, the Montgomery County Democrat who sponsored the bill in the House of Delegates. “It’s a big step forward and it’s going to be a national model.”

Proponents describe it as a minimally intrusive system under which the state will oversee but not manage a retirement plan for businesses. Employers are not required to contribute to the plan. They may use their existing automated payroll systems to make voluntary deductions on behalf of workers who choose to participate.

Opponents, which include the Maryland Chamber of Commerce and other business groups, see it as government overreach.
“It’s our position that it still puts government in the position of picking winners and losers,” said Mike O’Halloran, director of the National Federation of Independent Business in Maryland. “That’s something that should be left to the private sector.”

The law is set to be fully implemented in 2018.

A Wall Street Journal analysis of data from S&P Global Market Intelligence found that overall compensation for chief finance officers for 332 companies in the country fell by 1.5% compared to last year, owing to the slower rate of growth of pensions.

As explained in an article on the WSJ website:

This year’s major change was in the rate of pension growth. Pensions and deferred compensation, which are combined in proxy filings, grew by about half as much as they did in 2014, for the 134 companies in the group that listed a figure in that category.

Pension values are more a function of accounting, “driven by actuarial assumptions,” rather than strategic decisions, so they could fluctuate “simply because you change mortality assumptions or discount rates,” said Joseph Sorrentino, managing director of Steven Hall & Partners, an executive-compensation consulting firm.

Median pay for finance executives without deferred compensation and pension fluctuations, on the other hand, rose to $3.4 million this year from $3.3 million last year.

Ending the longest strike in its history, German airline Lufthansa and its cabin crew union have agreed to pay and pension scheme changes for 19,000 staff. The agreement will allow the carrier to reduce staff costs and move forward with its budget plans.

Some employees will be moves into a defined-contribution plan.

Reuters elaborated on the deal:

The new cabin crew deal, negotiated by a mediator, includes a pay rise of almost 5.5 percent from Jan 2016 to June 2019, plus a one-off payment of 3,000 euros ($3,344), which has already been paid. Lufthansa ruled out compulsory redundancies for five years.

Among the 20 different contracts agreed via a mediation process was the agreement of a defined contribution pension scheme rather than a defined benefit scheme, in line with what many other major European companies have done.

Overall, the agreement, which also includes flexible contracts to better cover seasonal demand, will allow Lufthansa to bring staff costs for cabin crew down by about 10 percent compared to previous projections, Bettina Volkens, Lufthansa board member for HR, told journalists.

Lufthansa, however, still has an ongoing dispute with its pilot union Vereinigung Cockpit but is also currently in talks with them for a new defined contribution pension plan.

Funding levels for state and local pension plans throughout last year was nearly unchanged, having risen from 73 percent in 2014 to 74 percent in 2015, according to a report released by the Center for Retirement Research at Boston College.

Funding declined slightly, however, when assets are valued per the new accounting rules of the Governmental Accounting Standards Board.

From Reuters:

If public pension plans meet their assumed expected returns over the next four years, plans should be 78 percent funded by 2020, the report found. Funds are highly sensitive to investment performance.

Across the country, many public pension funds have been recasting investment priorities as cash flows turn negative, meaning funds pay out more in benefits than they collect from contributions and investment income, a repercussion of more baby boomers retiring. Adding to the challenges, most retirement systems are underfunded, and investment returns have been choppy.

Pension plans on average assume a nominal return of 7.6 percent on their total portfolios and nominal stock returns of 9.6 percent.

Returns this year will likely be much lower.

A Federal appeals court upheld lower-court decisions and sided with Fort Worth in a suit, filed by police officers and fire fighters, over an alleged violation of a section of the Texas Constitution when the city cut pension benefits in 2012.

The decision is the third of a string of hearings over 2012 reforms that amended the calculation of benefits and cost-of-living adjustments for general employees, police officers, and fire fighters in Fort Worth.

In an article in the Star-Telegram, Circuit Judge Thomas Reavley said:

“Like most public pension plans in Texas, Fort Worth’s is underfunded,” Circuit Judge Thomas Reavley said in the opinion. “Over the years, Fort Worth has sought to improve the financial condition of its pension plan. We have concluded that [the section] permits prospective changes to the pension plan of the public employees within its reach.”

The executive director of Fort Worth Employees’ Retirement Fund said early last month that the board seeks to implement more aggressive investment policies to boost returns.

A former Disney employee filed suit against the company’s 401(k) committee this week for advising plan participants to invest in a fund that eventually lost $2 billion.

The fund in question was a large holder of Valeant Pharmaceuticals stock, the price of which has collapsed epically in the last 12 months (from $250 to $20).

More from the Orlando Sentinel:

Specifically, the federal lawsuit targets the Disney committee over its investment in the Sequoia Fund, which lost $2 billion after one of its biggest stocks tanked.

Patricia Du Vall is the plaintiff in the lawsuit, filed last week in California. She is a former IT analyst at The Walt Disney Co., according to her LinkedIn profile.

The lawsuit, which seeks class action status, also names as defendants several individual Disney executives who are committee members.

The committee invested in the fund and also gave employees the option of investing in it, one of Du Vall’s attorneys said.

Valeant Pharmaceuticals represented more than 30 percent of the Sequoia Fund’s assets, the lawsuit said. Valeant’s shares were more than $250 in August. Today they are at about $20. The company has had numerous problems in recent months including debt, federal probes of accounting and pricing practices, and shareholder lawsuits.

The committee “clearly knew or should have known that the Sequoia Fund was an imprudent investment,” the lawsuit said. “A prudent fiduciary would have recognized that….the Plan’s significant investment of employees’ retirement savings in the Sequoia Fund would inevitably result in devastating losses to the Plan and, consequently, to the Plan’s Participants.”