A recent survey found that, among all streams of retirement income and benefits, public employees were most confident in their pension and 401(k) benefits; both in terms of being there for them when they retire and being sufficient enough to get them through retirement.
People were least confident in Social Security and Medicare. Only a small portion of people were “very confident” they had enough savings to get them through retirement.
Chart credit: Retirement Confidence Survey 2014
Americans are thrilled to be saving money at the gas pump. But low oil prices aren’t good news for everyone – namely, oil and gas companies.
And that affects many Americans who are invested in oil and gas companies through their retirement accounts. But how much do low oil prices really hurt retirement funds?
Dan Boyce from Inside Energy explores the question:
Oil was at $55 to $60 a barrel just before Christmas, down from a high of more than $100 per barrel this summer.
Wanting to see just how much stake the average person has in oil and gas, we found that the most direct way to get access to sensitive personal financial information was if we analyzed one of our own retirement accounts. I humbly volunteered my own T. Rowe Price Roth IRA.
It’s a meager account, containing a little more than $4,200 at this point, and analyzing it for my oil and gas holdings revealed how complex the modern retirement portfolio really is.
My $4,200 splits among 19 smaller funds, which are invested in thousands of sources. The list ranges from companies like Tootsie Roll Industries and WD-40 to countries like Norway and even World Wrestling Entertainment.
It turns out a little less than 6 percent of my IRA is directly invested in oil and gas companies, or about $243.
Scott Middleton, who works with investment consulting company Innovest, said this mirrors the national average for retirement investments in energy at somewhere between 5 to 10 percent.
It’s true for IRA accounts like mine, as well as for others like 401(k)s, 403(b)s and pension funds.
The Colorado Public Employees Retirement Association, for example, has about 7 percent of its total portfolio in the energy sector, which in Wall Street-speak basically means just oil and gas. It makes up about 9 percent of the total stock market.
Middleton said as oil prices shrink, so, too, does my $243 in oil and gas investments. And so do most of the other funds invested in the same stocks.
But Boyce offers a few qualifiers that muddy the picture of just how much falling oil prices might hurt retirement savings:
A couple of things to remember, though. For one, I’m betting on my retirement account for the long term. The account is based upon the premise that I won’t start withdrawing from it until 2055.
Short-term fluctuations in price shouldn’t really concern us. Over the long term, the energy sector has been considered a very safe investment, yielding about a 10 percent annual rate of return.
Also, while declining oil prices might be bad for one part of my portfolio, they’re good for other parts. For example, Middleton said chemical producers and transportation companies tend to do well with lower oil prices.
Ultimately, oil and gas is not a critical part of our retirement funds. But, make no mistake, our retirement funds are absolutely critical for the oil and gas industry. The American Petroleum Institute says about 70 percent of U.S. oil company worth is owned by tens of millions of U.S. households through our IRAs, our pensions and our mutual funds.
Read the whole piece here.
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At one time, pensions were seen as the safest, most secure stream of retirement income. But the security of pension benefits is no longer rock-solid. That raises the question: do pensions give retirees a false sense of retirement security?
Economist Allison Schrager explores the idea:
Until recently, a pension benefit seemed as good as money in the bank. Companies or governments set aside money for employees’ retirements; the sponsors were on the hook for funding the promised benefits appropriately. In recent years, it has become clear that most pension plans are falling short, but accrued benefits normally aren’t cut unless the plan, or employer, is on the verge of bankruptcy—high-profile examples include airline and steel companies. Public pension benefits appear even safer, because they are guaranteed by state constitutions.
By comparison, 401(k) and other defined contribution plans seem much less reliable. They require employees to decide, individually, to set aside money for retirement and to invest it appropriately over the course of 30 or so years. Research suggests that people are remarkably bad at both: About 20 percent of eligible employees don’t participate in their 401(k) plan. Those who do save too little, and many choose investments that underperform the market, charge high investment fees, or both.
It turns out that pension plan sponsors, and the politicians who oversee them, are just as fallible as workaday employees. We all prefer to spend more today and deal with the future when it comes. Pension plans have done this for years by promising generous benefits without a clear plan to pay for them. When pressed, they may simply raise their performance expectations or choose more risky investments in search of higher returns. Neither is a legitimate solution. In theory, regulators should keep pension plan sponsors in check. In practice, the rules regulators must enforce tend to indulge, or even encourage, risky behavior.
Because pension plans seem so dependable, workers do in fact depend on them and save less outside their plans. According to the 2013 Survey of Consumer Finances, people between ages 55 and 65 with pensions have, on average, $60,000 in financial assets. Households with other kinds of retirement savings accounts have $160,000. It’s true that defined benefit pensions are worth more than the difference, but not if the benefit is cut.
As the new legislation makes clear, pension plans can kick the can down the road for only so long. Defined contribution plans have their problems, but a tremendous effort has been made to educate workers about the importance of participating. (Even if the education campaign has been the product of asset managers who make money when more people participate, it’s still valuable.) Almost half of 401(k) plans now automatically enroll employees, which has increased participation and encouraged investment in low-cost index funds. And now it looks like a generous 401(k) plan with sensible, low-cost investment options may turn out to be less risky than a poorly managed pension plan, not least of all because workers know exactly what the risks are.
Read the entire column here.
Photo by http://401kcalculator.org via Flickr CC License
China is planning a major overhaul of its pension system after complaints of unfair wealth distribution and favoritism towards government employees.
Reported by Bloomberg:
China will abolish a dual-track pension system that favors government employees and discriminates against others to create a fairer retirement-savings system.
Under existing rules, about 37 million employees with government agencies, communist organs and public institutions don’t have to contribute anything to their pension savings, with the government paying pensions of about 90 percent of their pre-retirement salaries. Those employed by businesses from banks to bakeries must contribute 8 percent of their salary to pension accounts, on top of 20 percent of their wages that’s paid by employers to a pooled pension fund. On average, private retirees end up with 40 percent of their working pay.
As the system has increasingly become a source of resentment among the public, Vice Premier Ma Kai said yesterday that the State Council and the ruling Politburo have agreed to implement a “unified” pension system, and government employees will have to contribute to their own pension accounts, the official Xinhua News Agency reported.
The report didn’t provide a timetable for the reforms.
Approximately 338 million people are covered by China’s pension system.
Photo by Jonathan Kos-Read via Flickr CC License
New York Governor Andrew Cuomo on Thursday vetoed a bill that aimed to raise the percentage of assets New York City and state pension funds could allocate towards hedge funds and private equity.
From Bloomberg:
Governor Andrew Cuomo vetoed a bill that would have allowed New York state, city and teachers pension funds to allocate a larger percentage of their investments to hedge funds, private equity and international bonds.
The measure approved by lawmakers in June would have increased the cap on such investments to 30 percent from 25 percent for New York City’s five retirement plans, the fund for state and local workers outside the city, and the teachers pension. The funds have combined assets valued at $445 billion.
“The existing statutory limits on the investment of public pension funds are carefully designed to achieve the appropriate balance between promoting growth and limiting risk,” Cuomo said in a message attached to the veto. “This bill would undermine that balance by potentially exposing hard-earned pension savings to the increased risk and higher fees frequently associated with the class of investment assets permissible under this bill.”
[…]
A memo attached to the New York bill said raising the allotment for hedge funds and other investments is necessary for flexibility to meet targeted annual returns. A swing in the value of the funds’ publicly traded stocks can push the pensions “dangerously close” to the investment cap, the memo said. The change would also better enable the funds’ advisers and trustees to “tactically manage the investments to take advantage of market trends, react to market shocks and potentially costly rebalances or unwinds at inopportune times,” it said.
New York City Comptroller Scott Stringer supported the bill.
Photo by Tim (Timothy) Pearce via Flickr CC License
Andrew Biggs, former deputy commissioner of the Social Security Administration and current Resident Scholar at the American Enterprise Institute, penned a column for the Wall Street Journal this week in which he posed the thesis that public pension funds invest in too many risky assets.
To start, he compares the asset allocations of an individual versus that of CalPERS. From the column:
Many individuals follow a rough “100 minus your age” rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.
Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a “100 minus age” rule would recommend that Calpers hold about 38% risky assets. In reality, Calpers holds about 75% of its portfolio in stocks and other risky assets, such as real estate, private equity and, until recently, hedge funds, despite offering benefits that, unlike IRAs or 401(k)s, it guarantees against market risk. Most other states are little different: Illinois holds 75% in risky assets; the Texas teachers’ plan holds 81%; the New York state and local plan 72%; Pennsylvania 82%; New Mexico 85%.
The column goes on:
Managers of government pension plans counter that they have longer investment horizons and can take greater risks. But most financial economists believe that the risks of stock investments grow, not shrink, with time. Moreover, while governments may exist forever, pensions cannot take forever to pay off their losses: New accounting rules promulgated by the Governmental Accounting Standards Board (GASB) and taking effect this year will push plans to amortize unfunded liabilities over roughly 15 years. Even without these rules, volatile pension investments translate into volatile contribution requirements that can and have destabilized government budgets.
Yet public-plan managers may see little option other than to double down on risk. In 2013 nearly half of state and local plan sponsors failed to make their full pension contribution. Moving from the 7.5% return currently assumed by Calpers to the roughly 5% yield on a 38%-62% stock-bond portfolio would increase annual contributions by around 50%—an additional $4 billion—making funding even more challenging.
But the fundamental misunderstanding afflicting practically the entire public-pension community is that taking more investment risk does not make a plan less expensive. It merely makes it less expensive today, by reducing contributions on the assumption that high investment returns will make up the difference. Risky investments shift the costs onto future generations who must make up for shortfalls if investments don’t pay off as assumed.
Read the entire column here.
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As defined-benefit plans around the country become more costly, some local governments have begun switching new hires into defined-contribution (DC) plans.
But those same governments have been slow to adopt automatic enrollment practices, according to a report published in the November issue of Pension Benefits.
From the article:
The public sector has been much slower that the private sector to adopt automatic enrollment for its defined contribution (DC) plans: only 2% use automatic enrollment. Currently, five states have automatic enrollment for the DC plans available for their workers: Georgia (ERSG), Missouri (MOSERS), South Dakota (SDRS), Texas (TRS), and Virginia (VRS).
[…]
Workforce trends and the current state of public retirement benefits strongly suggest that DC features that encourage savings, such as automatic enrollment, can play an important role in the retirement income security of many public employees.
So why haven’t local governments adopted auto enrollment practices? The article’s author, Paula Sanford, offers some reasons:
– Legal constraints. Only 11 states permit automatic enrollment for public DC plans. In a few places, an exemption to anti-garnishment laws has been written into statute for a particular retirement system or plan.
– Perception. Government leaders worry that automatic enrollment in a supplemental savings plan might overburden their employees, especially those who earn modest wages.
– Labor questions. There is debate in the labor community about whether automatic enrollment should be supported.
– Administrative challenges, such as multiple record keepers.
Cobb Country, Georgia, offers an example of how auto enrollment can increase participation:
The county started automatic enrollment for new employees in January 2013, and the feature has been very successful at increasing participation in the 457(b) plan. Prior to automatic enrollment, countywide participation in the 457(b) plan was only at about 33%; yet in just a little over a year, it has increased to 57.5%. This increase is striking considering that approximately two-thirds of the employees still participate in the original DB plan. The initial employee contribution under automatic enrollment is 1% of salary, and the county has kept its matching formula for all hybrid plan participants.
Read the full report, containing further analysis and other examples, in the latest issue of Pension Benefits or here.
Photo by TaxCredits.net
A recent poll reveals that a large percentage of New Jersey residents plan to leave the state before retiring – 25 percent of respondents said it was “very likely” that they would move away from New Jersey and retire in another state.
From the Daily Journal:
Joseph Peters wants to retire in New Jersey, but instead he plans to move elsewhere.
[…]
He’s not alone.
Half of New Jerseyans would like to retire elsewhere, according to a new Monmouth University/Asbury Park Press poll. More than a quarter of those surveyed consider it very likely that they will actually move. Cost of living and taxes remain the driving factors for those wanting to flee upon retirement, with more than a third of adults concerned about their savings.
“Taxes are considerably less in Pennsylvania and areas that I’m looking at,” said Peters, who will rely on his savings in his employer’s 401(k) plan, a federal pension and Social Security in retirement. “My federal pension will not have a state tax on it in Pennsylvania, and the property costs are considerably less for buying a raw piece of land and building a new house, or even buying an existing house.”
If soon-to-be-retirees do start moving, there are implications for New Jersey’s economy. From the Daily Journal:
If more retirees follow Peters’ footsteps, New Jersey gradually will experience a difficult time making economic ends meet. An exodus of retirees would mean the loss of income taxes from their pensions and sales taxes from their spending at businesses within the Garden State. Combined, the factors paint a grim picture for those left behind.
“That means less state revenues for other programs that may be valuable to New Jersey citizens,” said James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.
But New Jersey’s options to fix the situation remain scarce. The Garden State’s budget fell short by $800 million last year. The state balanced its budget this year only after Gov. Chris Christie slashed the state’s contribution to a pension fund for public workers.
“We don’t have a lot of wiggle room to adjust our tax system as it is since we’re short of revenues,” Hughes said. New Jersey’s “not going to change that destiny very much. We are going to lose some affluent seniors, middle-income seniors and the like.”
New Jersey’s housing costs for seniors are the highest in the U.S., and healthcare costs are the third-highest.
The state also taxes pension benefits at a rate of 3.6 percent; that number has grown from 3.1 percent since 2000.
Are affluent households worrying about having enough money to last through retirement? According to a survey from Bank of America, the short answer is “yes” – in fact, it’s one of their biggest concerns.
Bank of America polled 1,000 “affluent” people with investable assets of between $50,000 and $250,000. The results were published in the October issue of Pension Benefits:
“More than half (55%) of the mass affluent (defined as individuals with $50,000 to $250,000 in total household investable assets) fear going broke during retirement-far more common than other stress-inducing pressures such as losing their job (37%).
More women than men (59% versus 51%) are frightened about the possibility of not having enough money throughout retirement, and the fear of an uncertain retirement is also most common among 61% of Gen Xers (aged 35 to 50) and 61% of Boomers (aged 51 to 64). Only 41% of Millennials (aged 18 to 34) feel this way.
Despite their fears about future finances, many mass affluent won’t consider cutting back on indulgences today to save for retirement-from entertainment (33%) to eating out (30%) to vacations (28%).
Even if they were faced with a hypothetical milliondollar windfall, fewer than one in five (19%) would make it a priority to set aside the ‘found money’ for their retirement years.
More Boomers (27%) than Gen Xers (16%) and Millennials (6%) would first consider allocating a million-dollar lottery prize to their retirement funds.
Additionally, the most common factors competing with respondents’ regular retirement savings are unexpected costs (33%) and paying off big debts (31%). Paying off large debts (such as student loans) has competed with the retirement savings of more Millennials (38%) than any other generation.
On average, retired respondents stopped working at age 68; however, those who have not retired plan to at age 65. Single mass affluents, on average, plan to retire or have retired at age 62. More than two in five (41%) mass affluents who have not retired yet imagine that they’ll need an annual income somewhere in the $50,000 to $99,999 range when they retire.
About a quarter of Millennials (24%) and Gen Xers (25%) believe they’ll need at least $150,000 annually when they retire-far more than Boomers, with just 11% believing they’ll need that much income in retirement.
As for when people began saving for retirement:
Most (90%) of the mass affluent have retirement savings and began saving at 33 years old, but Millennials are planning for the future at a much younger age, with more than half (54%) starting between the ages of 18 to 24- Eighty percent of Millennials currently have retirement savings.
The most common trigger for those with retirement savings to begin investing for retirement was an account being offered at work (48%). Far fewer were spurred to invest due to major life events like getting married (18%) or having their first child (12%).
More millennials (36%) and Gen Xers (32%) than Boomers (15%) and Seniors (12%) were motivated to save for retirement when they started their first jobs. Almost three in ten (28%) Millennials first started saving for retirement after a raise or promotion at work, versus 10% of older generations.
The article can be read in the journal Pension Benefits. The report can also be viewed here.
Photo by 401kcalculator.org
A new poll conducted by Wells Fargo has affirmed what other recent surveys have already found: many Americans are putting off saving for retirement, and a significant percentage of people have no retirement savings at all.
This survey is of interest because it focused specifically on middle-class Americans.
The results:
Forty-one percent of middle-class Americans between the ages of 50 and 59 are not currently saving for retirement. Nearly a third (31%) of all respondents say they will not have enough money to “survive” on in retirement, and this increases to nearly half (48%) of middle-class Americans in their 50s. Nineteen percent of all respondents have no retirement savings. On behalf of Wells Fargo, Harris Poll conducted 1,001 telephone interviews from July 20 to August 25, 2014 of middle-class Americans between the ages of 25 and 75 with a median household income of $63,000.
Sixty-eight percent of all respondents affirm that saving for retirement is “harder than I anticipated.” Perhaps the difficulty has caused more than half (55%) to say they plan to save “later” for retirement in order to “make up for not saving enough now.” For those between the ages of 30 and 49, 59% say they plan to save later to make up retirement savings, and 27% are not currently contributing savings to a retirement plan or account.
Sixty-one percent of all middle-class Americans, across all income levels included in the survey, admit they are not sacrificing “a lot” to save for retirement, whereas 38% say that they are sacrificing to save money for retirement.
[…]
While a majority of middle-class Americans say that they are not sacrificing a lot to save for retirement, 72% of all middle-class Americans say they should have started saving earlier for retirement, up from 65% in 2013. When respondents were asked if they would cut spending “tomorrow” in certain areas in order to save for retirement, half said they would: 56% say they would give up treating themselves to indulgences like spa treatments, jewelry, or impulse purchases; 55% say they’d cut eating out at restaurants “as often”; and 51% say they would give up a major purchase like a car, a computer or a home renovation. Notably, fewer people (38%) report that they would forgo a vacation to save for retirement.
The survey also asked people how much money they had saved:
According to the survey, middle-class Americans have saved a median of $20,000, which is down from $25,000 in 2013. Middle-class Americans across all age groups in the study expect to need a median savings of $250,000 for retirement, but they are currently saving only a median amount of $125 each month. Excluding younger middle-class Americans who may be earning less money, respondents between the ages of 30 and 49 are putting away a median amount of $200 each month for retirement, whereas those between the ages of 50 and 59 are putting away a median of $78 each month for retirement.
Twenty-eight percent of all age groups included in the survey report that they have a written financial plan for retirement. That number is slightly higher, 34%, for those between the ages of 30 and 39. People with a written plan for retirement are saving a median of $250 per month, far greater than the median $100 per month that is being saved by those without a written plan.
The entire report can be read here.
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