Pension Matters
State Employees Retirement Fund
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June 2013
Public Sector Workers, Job Security and Pay
A new issues brief out by the Center for Retirement Research at Boston College finds that, “Given the nature of their employment, state/local workers have historically been less vulnerable to layoffs than private sector workers. And, despite the negative impact of the Great Recession on state/local employment, public workers still had a greater degree of job security than private workers during this period. While this relative security is an attractive aspect of state/local employment, other non-monetary factors make public sector jobs less attractive. Even if these negative factors are ignored, estimates of the value of job security suggest that it is not large enough to overturn the conclusion that state/local and private sector workers receive about the same total compensation.
You can read the entire brief at http://goo.gl/2S2ZH
Adjustable Pension Plans
According to a recent article in Governing, “Defined-benefit plans place the risk on employers, and defined-contribution plans shift it to employees. But risk would be shared under a new approach that seems to offer something for everyone.
Adjustable pension plans (APPs) guarantee lifetime payments to employees. But unlike traditional defined-benefit systems, the size of the benefit would be adjusted based on the pension fund’s investment performance during the previous year. For employees, it means that while payments would often be less than under traditional defined-benefit plans, they would be secure.” Read more at http://tinyurl.com/kyjda3u
Pension Plan Comparisons
Detroit Free Press recently compared various local government pension plans. Wayne County and State of Michigan Retirement Systems were the most significantly underfunded with Wayne County at 49.8%, Michigan Public Schools Retirement System at 64.7% and Michigan State Emp. Ret. System at 65.5%. Macomb and Oakland counties were at 100% followed by Detroit Police and Fire at 99%, Detroit General Employees at 82.8% Read more at http://tinyurl.com/ms7y88m
Pension Money Squandered
When we talk about fees eating up much of our pension dollars, we don’t think of administrators of those funds going to Hawaii for a conference on our dollars. That’s what happened in Detroit. When will pension administrators understand that this is not their money?
Favorite quote, “....pension assets are a big, inviting honey pot” (Jeff Hadden, Detroit News) Read the article about this at http://tinyurl.com/lv9rr2b
457/401k PLAN UPDATE
(SERA Member Dick Weller has agreed to be a contributing writer to the Pension Matters column to include more in depth information for persons in the 457/401k plans. ) Because the 457/401k plans are a significant part of your retirement planning, we are adding a more expansive segment. Many issues have come to light related to these plans that we feel will be of interest to you.
The current deferred compensation management agreement (with ING) expires in September, 2013. As far as we know, ORS did not initiate contact with SERA or other stakeholders to ask for input in preparing the new RFP although a draft RFP has been reviewed and several modifications submitted. After several attempts, including a formal FOIA request, the finalized RFP was obtained.
A review of the existing agreement noted that members are required to liquidate (to cash) their investments prior to rolling the funds out to another financial manager. This can prohibit you from retaining your investment in a given fund, if that fund has been closed to new investors, when you attempt to repurchase the fund with your new financial manager. In addition, the amount of time that the third party administrator (TPA) has to process items seems excessive and can result in funds not being available for investment. Changes in these areas were suggested to ORS for inclusion in the new agreement when the draft was reviewed.
We requested the new RFP from Office of Retirement Services (ORS) to determine if any of the suggested changes were included in the new RFP. ORS required us to use a Freedom of Information (FOIA) request to obtain the RFP. A review of the new RFP noted that it did not appear to address those issues identified to ORS. SERA also was concerned about who was going to evaluate the proposals and contacted Purchasing to determine the makeup of the related joint evaluation committee, and was denied that information. The evaluation process is on-going. We do not know who the new plan manager will be at this writing.
How Much Can You Expect From Your 401(k)
Do you know how much of a monthly payment you will have from your investment in a 401(k)? Apparently ;no one has to tell you either. However, federal rules are being proposed that would “require estimated income illustrations for workers participating in defined contribution pension plans...” And those writing those rules would like to hear from you about what kinds of information and scenarios would be helpful.
The Department of Labor has set up a calculator that can help with payment projections now. Go to www.dol.gov/ebsa and search for “Lifetime Income Calculator.” You will also find the proposed rules, public comments and a fact sheet.
Where Does The Money Go In Individual Retirement Accounts (IRAs)?
According to new research by the nonpartisan Employee Benefit Research Institute (EBRI),” most of the new contributions go into Roth IRAs, but most of the assets are held in traditional IRAs, where the money originated from a rollover from other tax-qualified retirement plans (such as 401(k) plans) and not from new contributions."
The EBRI analysis also shows that “ individuals with a traditional IRA originating from rollovers had the highest average and median (mid-point) balances of $110,918 and $31,944, respectively. Roth owners had lower average and median balances at $25,228 and $11,344. And in the 2011 EBRI IRA Database, almost 13 times the amount of dollars were added to IRAs through rollovers than from new contributions.
IRAs hold more than 25 percent of all retirement assets in the United States, which makes them a vital component of the nation’s retirement savings. Overall, the total average IRA account balance in 2011 was $70,915, while the average IRA individual balance (all accounts from the same person combined, since many individuals own more than one IRA) was $87,668. The median account balance was $19,619, and the median individual balance was $23,785. “
Among the other findings in the EBRI IRA report:
- “Males had higher individual average and median balances than females: $114,745 and $30,704 for males, respectively, vs., $66,529 and $21,642 for females. The median balance for males reached $72,971 for those ages 70 or older, compared with $42,926 for females of that age.
- Of those individuals contributing, 47.2 percent contributed the maximum amount. Just over one-half (50.7 percent) of those contributing to a traditional IRA contributed the maximum, while 43.6 percent did so with a Roth IRA.
- While more than 1.6 million accounts received contributions and approximately 1.1 million accounts received rollovers in 2011 in the database, almost 13 times the amount of dollars were added to IRAs through rollovers than from contributions.
- More contributions were made to Roth accounts than to traditional IRAs in the database. However, at $3,879, the average contribution to a traditional account was higher than the $3,633 average contribution to a Roth account. Yet, a higher overall aggregate amount was contributed to Roth IRAs ($3.7 billion for Roths compared with $2.3 billion for traditional accounts).
- Roth IRAs had a higher percentage of younger individuals contribute to them than did traditional IRAs, as 23.8 percent of the Roth accounts receiving contributions were owned by individuals ages 25–34, compared with 8.9 percent for traditional IRAs. “
Full details of the report are published in the May 2012 EBRI Issue Brief, “Individual Retirement Account Balances, Contributions, and Rollovers, 2011: The EBRI IRA Database,” available online at www.ebri.org
Do You Need a Financial Advisor?
Financial advisers can cost a lot of money. So be sure you are getting what you paid for. Many advisors focus on affluent customers leaving the middle class folks out in the cold. Check out this article in USA Today for some tips. http://tinyurl.com/c5k62a8
Quick Facts on SSA Benefits
- 41.4% take benefits as soon as they’re eligible at 62 (SSA)
- half of Americans 65 and older rely on Social Security for at least 50% of their family income (AARP)
- minorities are less likely to receive benefits, and when they do, are more likely to be more dependent on them (AARP)
- The average benefit is $15,00 a year. Waiting until 67 the benefit is no more than $30,000 ( AARP)
CPI Explained
So what exactly is chained CPI? In short, it’s a way of linking the substitutions people make in their spending habits to the CPI. “For example, suppose I buy an equal number of apples and bananas each week, and the price of apples goes up by 10%, while bananas don’t go up at all,” Duggan says. “The CPI would say I’ve seen an increase in inflation, when in fact I’m probably going to buy more bananas.” Usually, the chained CPI is about a quarter of a percent lower than the normal CPI.
Translating that fraction of a difference to Social Security payouts would yield a small decrease in the rate at which the payouts grow. “Say I’m 66 years old and my payment starts at $1,000 a month,” Duggan says. “Instead of growing to $1,030 in that first year, it would grow to $1,028. That second year, instead of growing to $1,060, maybe it would grow to $1,055.” Read more at http://knowledge.wharton.upenn.edu/article.cfm?articleid=3238
Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.
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