How Much Are Low Oil Prices Hurting Retirement Accounts?

oil barrels

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.


Photo by ezioman via Flickr CC License

Exploring Defined Benefit Distribution Decisions By Public Employees

Pink Piggy Bank On Top Of A Pile Of One Dollar Bills

When public workers with defined benefit plans leave their jobs, they are usually given the option to either withdraw their accrued retirement savings as a lump sum or keep their retirement account open, to be redeemed upon retirement.

If the employee elects to go the lump-sum route, they can roll that money over into an IRA or simply accept it as taxable income and pay the associated penalty for early withdrawal.

Employees around the country make this decision every day. But it’s one with significant retirement implications, and there’s little understanding as to what drives people to decide one way or the other.

In a paper recently published in the Journal of Public Economics, Robert L. Clark, Melinda Sandler Morrill and David Vanderweide explore the decision-making process.

The basic findings of the paper:

Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation.

Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

More detailed findings from the paper:

We find that fewer than one-third of all terminating public employees requested a LS [lump sum] within one year of separation, despite the finding that for over 70% of terminations, the LS was larger than the estimated PDVA. These results indicate a low probability of leakage from retirement funds, although many workers are seemingly forgoing the possibility of higher retirement income possible from rolling over funds to an IRA.

We offer several potential explanations for why the distributional choice from a public pension plan is more complex than a simple wealth comparison at a point in time. First, separating participants in TSERS qualify for retiree health insurance from the State Health Plan with no premium as long as they are receiving a monthly annuity from TSERS…Despite the difference in coverage of retiree health insurance in the two systems, we do not see a large difference in the distributional choices between separating workers that will qualify for retiree health insurance and those that will not.

Second, we consider the likelihood that terminated participants may plan to return to public employment. The expectation of returning to public employment might make maintaining the account the optimal choice for these individuals…

workers are not responding to incentives of outside investment options. We do find that when the state unemployment rate rises, individuals are significantly less likely to withdraw funds. This could be due to selection into who is separating employment, or it may be that individuals more heavily rely on defaults in times of economic turmoil.

The final explanations we consider for why public sector workers in North Carolina do not withdraw funds at a higher rate are financial literacy, peer effects, and inertia. The default is to leave funds in the system. The behavior we observe is consistent with many individuals accepting the default option and forgoing potentially more valuable benefits.

The paper, titled “Defined benefit pension plan distribution decisions by public sector employees”, can be read in full here.


Photo by www.SeniorLiving.Org

Retirees Grapple With Tough Question: Should Pension Payments Be Taken Monthly Or As Lump Sum?

retirement fund

Many people facing retirement ask their financial advisor the same question: is it more advantageous to receive a pension in monthly payments or to take the entire pension as a lump sum to be put in an IRA?

There are big implications attached to either option. And the stakes are high; once you opt for a monthly payment there is no reversing course. As advisor Kevin McKinley writes:

Once the client submits the request to receive the monthly pension payments, there is no turning back. He or she can’t change the time and beneficiary calculation options down the road, and it’s virtually impossible to get an “advance” on future payments.

That could be a problem in several instances, including a need to cover a large emergency expense, the desire to help out a family member, or the emergence of a more attractive investment opportunity.

A big part of the decision to take monthly payments should be how confident you feel in your pension fund’s investment portfolio. A retiree, or his/her financial advisor, might be able to construct an investment portfolio that makes the retiree more comfortable taking the lump sum:

Since the portfolio has to be managed on behalf of thousands of recipients, plus other interested parties, it’s a safe bet that the pension plan’s managers will have to make decisions that may go against what individual clients would like done with their portion of the money.

You can probably tailor a portfolio that is better aligned with the client’s needs and risk tolerance. You certainly can design and manage one that is much more flexible and transparent than if it were left in the pension.

And then there are the tax implications that come with both options, as McKinley writes:

A pension payment is generally going to be fully taxable as ordinary income. But if the funds are instead rolled over into an IRA, the client has several opportunities to reduce his income tax bill each year.

He can take just enough to keep him under a particular federal income tax bracket. Or, he can roll over some (or all) of the account into a Roth IRA, paying the taxes now to hopefully reduce what he pays down the road.

Another option is to take nothing at all and avoid the taxes completely for the time being. The client will likely have to take required minimum distributions after reaching age 70½, but those won’t greatly exceed what a pension payment might otherwise be.

The article notes that, when it comes down to it, retirees need to ask themselves two questions: Are they confident their pension is going to exist as long as they’ll need it?

And, are they confident in their pension fund’s ability to invest and manage their money?

If a retiree lacks confidence in both of those questions, perhaps a lump sum would offer better peace of mind.