Pension Matters

State Employees Retirement Fund
Most Recent Market Value | Archived Monthly Profiles

July 2013

Retirement Board Meeting

At the June 27th Board meeting, highlights of the actuarial pension valuation and health care valuation for the period ending September 30, 2012 were presented by the actuaries from Gabriel Roeder Smith & Company.

As we have been hearing for some time, the news is not good for the pension valuation. With the closure of the defined benefit plan there are significantly more retirees and beneficiaries that active employees paying into the system. In addition, the markets have been volatile and employer payments into the system have also diminished leaving more going out than coming in. The ratio of active members to pension benefit recipients is at .32 to 1.0 due to the plan being closed. In FY12 $1,156 billion was paid out in benefit payments and yet the average pension for that same time period was $20,313. As of September 30, 2012 the plan was 59.2 percent funded.

The valuation report on retiree health benefits was a bit rosier. Annual expenditures for retiree health care benefit for FY 2012 was $493 million. The unfunded liability (value of benefits promised) is $8.4 billion. PA 264 of 2011 contained an option for DC participants to opt out of their current retiree health insurance coverage and switch to the Personal Healthcare Fund. Approximately 3200 employees too this option.

Both reports can be found on the ORS web site at www.michigan.gov/ors and follow the link to the Defined Benefit Page.

June Investment Advisory Committee (IAC) Meeting

I attended the June 18th IAC meeting today. Mr. Braeutigam presented the Executive Report. He stated the plan has underperformed its policy benchmark over the past year. It has also underperformed the peer median rate of return. Annualized return as of March 31, 2013 was 10.4 percent for the past year. The system has paid out $2.9 billion over the past 12 months which represents 5.7 percent of its March 31, 2012 asset value.

Marc Rowan, co-founder and Senior Managing Director of Apollo Global Management, LLC presented to the committee. Apollo Global Management is a global alternative asset manager. It invests in private equity, credit and real estate.” Alternative asset investments can include any investments outside of the mainstream of conventional asset types, such as stocks, bonds, cash, mutual funds. SMRS has about $500 million invested with this company.

Invest Michigan was discussed under alternative investment. SMRS has committed $510 million to the program . The report shows $227 million in investment across 39 deals through the end of March, 2013.

The entire Committee report can be found on the Bureau of Investment page at the Treasury web site as well as asset liability studies and links to other funds.

Retirees Going to Court

A group of Flint and Pontiac retirees want an annulment with their cities’ emergency managers. The retirees contend in a lawsuit filed on May 30th in U.S. District Court against numerous Flint, Pontiac and state officials, that the Michigan’s emergency manager statute goes around the bankruptcy and contract clauses in the U.S. Constitution.

“Emergency managers have stripped cities and their residents, retirees, students and workers of their assets, health care, pension systems, vital services and their basic right to open government and democracy,” the City of Pontiac Retired Employees Association and Flint’s United Retired Government Employees said in a joint statement. http://tinyurl.com/lr8u82g

Bond Issue for Pensions

Bloomfield Township plans to become the first community in Michigan to issue bonds that will pay for retiree pensions or health care. According to the Township Finance Director Ray Perkins, “issuing bonds would also lead to significant long-term savings for taxpayers. The 20-year projection in savings is 60 million dollars or averages 3 million dollars per year in savings for the taxpayer.” Read the article at http://tinyurl.com/mnmduu4

457/401k plan update - Service Fees

Service Fees charged (deducted) related to individual accounts seems to be an issue to many members.  The current statements do not break out the actual dollars of service fees charged to the individual accounts.  The current agreement with ING provides the charging of fees in two different structures for State employees and retirees.   These fees are calculated on an annual basis, but the agreement was not clear as to the frequency that they were charged but monthly would seem likely.

(1) An investment management fee based on a percentage of their plan assets is charged to all participants.  This percentage varies by fund. For those individuals in tier I the expense ratio ranged from 5 to 24 basis points and in tier II they ranged from 52 to 141 basis points, this includes 12b1 fees.  (100 basis points equal 1%)

(2) Revenue Sharing for Recordkeeping and Administration – All participants also pay a revenue sharing amount as a percentage of their Plan assets for each fund.  According to the current agreement 4 basis points of this is returned to the State and the remainder is retained by the plan administrator.  This percentage also varies by fund.  For those individuals in tier I, the revenue sharing ratio ranged from 4 to 17 basis points and in tier II they ranged from 10 to 47.5 basis points.  To provide you with an example of how much this would be let us say that retiree A has $100,000 in the 401k portfolio.   Using the average management fee for tier II (97 basis points) times the $100,000, this equals $970.  Using the average revenue sharing fee for tier II (29 basis points) times $100,000, this equals $290.  When added together, it amounts to $1260 annually.  These fees can be higher or lower depending on which funds you hold and the amounts in each of them.

In the new RFP, ORS is requesting a proposal for a uniform flat fee which would leave the investment management fee as it currently is, eliminate the revenue sharing component and replace that with a flat fee for record keeping and administration.   All participants would pay the same single flat fee quarterly regardless of the number of accounts the participant has.  $4.00 per participant per quarter of this would be returned to the State for its administrative costs.   As of this time, I am not aware of which fee structure will be included in the new agreement. Whichever way ORS goes would it not be nice to see the specific amount that you were paying for fees on your statements? (Dick Weller, SERA Member)

(NOTE: “Department of Technology, Management & Budget, Procurement has completed the evaluation of the above RFP and recommended an award to ING Institutional Plan Services to provide Investment and Administrative Services for 401(k) and 457 Plans for the Procurement Department in the amount of $117,881,696.10, pending management and State Administrative Board approval.” Great-West Financial and Ing Institution were the only two bidders.

Favorite Quote: “...politicians cannot be trusted to adequately pre-fund a conventional defined-benefit pension system. In Michigan, not even strong language in the state constitution has been sufficient to break the vicious cycle of current lawmakers underfunding benefits promised to government and school employees.” (from an article by James M. Hohman and Jack McHugh of Michigan Capital Confidential).

Pension Scam

Ever hear of something called a “mirrored pension” that touts robust returns? If you're not careful, you could be looking at a smoke-and-mirrors kind of a deal. Scammers are out offering lump sum payments for your monthly pension. Always remember “High-yields in general come with high risks for investors and considerable fees.” Read more http://tinyurl.com/kkmcuf9

Prevent Scammers from Getting Your Social Security

Thieves increasingly are stealing beneficiaries’ payments by rerouting them into their own accounts or onto a debit card. Between October 2011 and June 2013, an astounding $28 million in benefit payments have been stolen.

A few things you can do to prevent this kind of fraud:

  • Never give out your personal information to unsolicited callers
  • Don’t agree to accept pre-paid debit cards or credit cards in another person’s name
  • Never send or wire money to an unknown person
  • Contact your local SSA office if you receive a call from a person claiming to be from SSA, and that person asks you to provide your Social Security number or other information

Read more about this http://tinyurl.com/l6mwyr3

Social Security’s Financial Outlook: The 2013 Update in Perspective

The Center for Retirement Research has released a new Issue in Brief. Below are the key findings:

The 2013 Trustees Report shows virtually no change from last year:

  • Social Security’s deficit still about 2.7 percent of payroll.
  • Deficit as a percent of GDP still less than 1 percent.
  • Trust fund exhaustion still 2033, after which payroll taxes still cover about three quarters of promised benefits.

While the shortfall is manageable, it should be eliminated soon to:

  • Restore confidence in the program.
  • Avoid larger tax/benefit changes that would result from delay.
  • More fairly distribute the burden across generations.
  • And the disability insurance program needs immediate attention, as its trust fund is expected to be exhausted in 2016.

This brief is available at http://tinyurl.com/loj94cn

Check It Out

Retirement Toolkit developed with the Social Security Administration and the Centers for Medicare and Medicaid Services, available at www.dol.gov/ebsa/pdf/retirementtoolkit.pdf

More Information on How and Why Pensions are Important

In the article, “10 Ways to Pay for Retirement,” U.S. News & World Report lists the most common ways to pay for retirement.

  1. Social Security.
  2. A pension.
  3. Retirement accounts.
  4. Home equity.
  5. Stock market investments.
  6. Savings accounts.
  7. Annuities or insurance plans.
  8. Part-time work.
  9. An inheritance.
  10. Rent and royalties.

Pensions are a big part of how people prepare for retirement, along with working longer, saving more, and — as a last resort — tapping home equity. Read the http://finance.yahoo.com/news

Retirement Crisis

New report out by the National Institute of Retirement Studies shows:

  • The typical working-age household has only $3,000 in retirement account assets; the typical near-retirement household has only $12,000.
  • Four out of five working families have retirement savings less than one times their annual income.
  • The U.S. retirement savings deficit is between $6.8 and $14.0 trillion, depending on the household assets counted.

Read more from their study at www.nirsonline.org

Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.

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