Pension Matters

State Employees Retirement Fund
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April 2015

New State Treasurer

Gov. Rick Snyder recently named Nick Khouri, current Senior Vice President at DTE Energy to be his new state treasurer, replacing Kevin Clinton according to an article in the Lansing State Journal. Mr. Khouri plans to retire from DTE next week and start work as the new state treasurer on April 20. Mr. Khouri also serves as the current Chair of Treasury’s Investment Advisory Committee, See the full official news release at www.michigan.gov.

Bureau of Investment(BOI) at SERA’s March meeting

Bureau of Investment’s Chief Investment Officer, Jon Braeutigam and Chief Operating Officer
Robert L. Brackenbury provided their annual investment update at this month’s SERA general membership meeting. They reviewed the funded ratio of the pensions as well as its asset allocation. The retirement fund has provided an excellent return on investment since the recession. The rates of return for the past one, three and five years have been well over the 8%.

(NOTE: the most recent Connections newsletter from the Office of Retirement Services also contains an FY 13-14 retirement system report for your review and information.)

Impact of New Governmental Accounting Standards Board (GASB) Rules

According to a recent article in Governing, new rules from GASB) represent significant changes in how retirement systems report pension liabilities.

Governing compiled financial data for 80 state and local pension systems that had published reports for fiscal year 2014. Figures reported in fiscal year 2013 using GASB 25 standards were compared to fiscal year 2014 figures reported under the new GASB 67 standards. The funding status improved for the majority of systems reviewed, mostly as a result of strong investment returns. Fifteen of the systems now, though, appear less funded under the new standards. More than a third of the plans reviewed also revised down their discount rates used to estimate total liabilities.” Unfortunately, Michigan was not part of the analysis. Read their analysis and see how others fared at www.governing.com.

Film Incentive Bill

The House amended HB 4122 to “ensure that credits already granted will be honored and any leftover funding will be used to pay back the state employee pension fund.

Detroit Pensioners “clawback”

On top of the 4.5% reduction in their pension, retirees owe money back that they received as part of a city retirement savings plan (which was in addition to their regular pension ) that paid a minimum of 7.9% interest on their savings between 2003 to 2013.

As part of the bankruptcy reorganization they must decide whether to pay what they “owe” in a lump sum or have it deducted from their monthly pension checks. If retirees do nothing, the money will automatically come from their pension checks. Read the entire story at www.freep.com.

For the full data note, as well as more information and analysis about Medicare, visit www.kff.org.

Pension Rights Center

“President Obama has announced that he wants to close a legal loophole that allows some brokers and other investment advisers to profit at their customers’ expense.” Because of conflicted advice, millions of us end up with lower savings in our retirement accounts. A White House report estimates that, “conflicted” advice is costing about $17 billion a year. And it’s eating away at the retirement savings of consumers like you and me.

Financial institutions and many on Wall Street who make money by selling these “conflicted” investments are already lobbying Congress to keep this loophole. They are more interested in protecting their high commissions than protecting the retirement savings of millions of investors.

To read the entire story and provide input on this issue go to www.pensionrights.org/

How Much Do I Need to Save?

A new Employee Benefit Research Institute (EBRI) analysis presents the required contribution rates for those starting to save at ages 25, 40, or 55. It also presents the minimum account balances required for those contributing to their plans at 4.5 percent, 9 percent, and 15 percent of salary, and shows how much they should have saved at a particular age threshold to be “on track” for a successful retirement. For instance, the EBRI analysis finds:

Savings Rates and Probability of Success

  • For a 25-year-old single male (with no previous savings) earning $40,000 a year, with a total (employee and employer combined) contribution rate of 3 percent of his salary until age 65 would result in a 5050 chance of retirement income adequacy; saving 6.4 percent of salary would boost his chances of success to 75 percent. Women that age would need more because of their longer lifespan.
  • A 40-year-old male with no previous savings earning $40,000 would need a total contribution rate of 6.5 percent of salary just to have a 5050 shot at a financially successful retirement, because he has less time to work and save. But saving 16.5 percent of salary would produce a 75 percent chance of success.
  • A 55-year-old male making $40,000 with no previous savings would need a total contribution rate of as much a quarter of his salary (24.5 percent) to have a 5050 chance of a successful retirement, again due to little time left in the workforce.

Minimum Account Balance

How much should a worker have saved by a particular age for a successful retirement? That depends on their salary, how much is being contributed to their defined contribution plan, and what odds they want for success. Again, the EBRI analysis breaks out the answers by those factors:

For instance, for a single male age 40 contributing 9 percent of salary:

  • At $20,000 a year, he would need $14,619 already saved for a 50 percent chance of retirement success.
  • At $40,000 a year, he’d need a minimum balance of $47,493 in savings for a 75 percent chance of success.
  • At $65,000 a year, he’d need $4,616 of pre-existing savings for a 90 chance of success.

EBRI notes that the numbers will vary by individual: For those who are younger and have higher savings rates, the required pre-existing savings level goes down.

The full report, “How Much Needs to be Saved For Retirement After Factoring in Post-Retirement Risks: Evidence from the EBRI Retirement Security Projection Model,®” is published in the March 2015 EBRI Notes, online at www.ebri.org

Does this Number Look Familiar : $18,433

That’s the median amount in a 401(k) savings account, according to another recent report by the Employee Benefit Research Institute. Almost 40% of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

Older workers do tend to have more savings. “At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living.” Not surprisingly, retirement is now Americans’ top financial worry, according to a recent Gallup poll.

Tax-advantaged 401(k) plans have provided a means for millions of retirement savers to save for retirement. More than three-quarters of employers use defined contribution plans as the main retirement income plan option for employees, and the vast majority of them offer matching contribution programs, which further enhance employees’ ability to accumulate wealth.

But 401 plans were not intended to be retirement mechanisms. “The 401(k) account came into being quietly, as a clause in the Revenue Act of 1978. The clause said employees could choose to defer some compensation until retirement, and they would not be taxed until that time. (Companies had long offered deferred compensation arrangements, but employers and the IRS had been going back and forth about their tax treatment.) 401(k)s were never designed as the nation’s primary retirement system,” said Anthony Webb, a research economist at the Center for Retirement Research. “They came to be that as a historical accident.” Read more at www.usatoday.com.

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

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