Five Retirement Fiduciary Events That Made a Big Difference in 2016

Kudos to Chris Carosa for his continued efforts as publisher of Fiduciary News. I share his mission to educate and provide independent insights. That is why I was delighted to be one of the contributors to his recent article, "These Five Developments Dramatically Changed the Retirement Fiduciary World in 2016."

My view is that it is hard to pinpoint standalone issues. So many areas overlap. For example, a discussion about fiduciary litigation frequently involves questions about the reasonableness of fees. A conversation about fees often means talking about asset allocation as well. An analysis of asset allocation trends is commonly linked to investment performance realizations. When one talks about returns, it is usually in the context of economic forecasts. Overlay regulatory mandates, including the imminent U.S. Department of Labor Fiduciary Rule, and it becomes apparent that retirement plan governance is complex territory. Nevertheless, Chris did a noble job of listing significant and distinct trends with his readers. His list includes the following:

  • Capital Markets - Low interest rates continue to challenge both institutional and individual investors. The pension risk transfer market is experiencing unprecedented growth as sponsors seek to focus less on retirement plan management and more on operating their core businesses. Post-election, the U.S. market seems poised for better returns in 2017 although it is thought that low-cost index funds will remain popular.
  • Excessive Fee Litigation - The attention paid to fee levels and the process of assessing reasonableness continues to grow. Some believe that the proliferation of lawsuits has resulted in improved governance regarding the selection and review of various funds. I am quoted as saying that "...investors in search of turbo-charged performance struggled with the reality that the costs of alternatives, derivatives and structured products are generally higher than passive funds."
  • Fiduciary Rule - Uncertainty is the watchword with multiple plan sponsors unsure about what they might want to delegate to a third party. Consulting firms that offer independent fiduciary services have an opportunity to help their clients solve real compliance problems.
  • State Sponsored Private Employee Retirement Plans - Deemed controversial by some, these arrangements to help small business employees are being rolled out by states throughout the nation. The goal is to encourage savings over the long-term although I have doubts about accountability and redress for disgruntled participants. Click to read "State Retirement Arrangements for Small Business Employees" (June 9, 2016) and "Public-Private Retirement Plans and Possible Fiduciary Gaps" (June 5, 2016).
  • Presidential Race - Carosa writes "Of all the events of 2016, nothing will have had more of an impact than the presidential election." Perhaps he is correct. Already the yearend markets have been chugging upward and optimism is on the rise. Yet there are questions about whether regulations such as the Fiduciary Rule will be weakened or perhaps eliminated altogether. Should that occur, financial service industry executives will need to respond.

The article lists other developments including restructuring deals. I am quoted as saying "Restructuring deals have made 2016 a notable year in terms of the number of pension risk transfers and the outsourcing of the responsibilities of a Chief Investment Officer to a third party. Bankruptcy has catalyzed the restructuring of multiple plans, much to the dismay of the savers who have been asked to accept lower benefits. Service providers who have been ordered by the courts to take less favorable terms as swap counterparties or consultants are correspondingly glum."

President John F. Kennedy declared "Change is the law of life. And those who look only to the past or present are certain to miss the future." I concur. Where there is disruption, there is always the opportunity to address a problem and win the hearts and wallets of investors.

Here's to a terrific 2017. Happy holidays!

Con Keating Weighs In About Pension Liability Valuation

I had the pleasure of meeting Mr. Con Keating a few years ago when I visited London on business. We had been introduced by the then CEO of a UK-based pension consulting firm who knew of our mutual interest in governance. Since that time, Mr. Keating has been consistently generous with his views about real problems faced by retirement plan fiduciaries. This is no small gift given the breadth and depth of his experience as an advisor, investment manager, board member and academic. Click here to read Con Keating's bio.

In response to my August 5 essay entitled "Valuing Public Pension Fund Liabilities" and a request for feedback from industry practitioners, Mr. Keating sent an interesting paper from 2013 that I have finally been able to read. Entitled "Keep your lid on: A financial analyst's view of the cost and valuation of DB pension provision," he joins co-authors Ole Settergren and Andrew Slater in advocating for the use of a pension's Internal Growth Rate ("IGR") as the appropriate discount rate to adopt for purposes of reporting the financial health of a defined benefit ("DB") plan. To do otherwise would "lead to over or under estimates, bias and volatility," in part because exogenous metrics such as a risk-free rate "do not reflect scheme arrangements and dynamics." Instead, this analytical trio offers up the IGR as the only benchmark that adequately considers contributions and the concomitant impact on obligations. As they importantly point out, similar to the message of their U.S. peers, getting an accurate valuation is essential as it drives other key economic outcomes such as potential tax hikes levied to fund government pension plans in deficit. Applied to corporate plans, bad pension valuations can lead to a diminution of enterprise value. This is something I addressed at length in my Journal of Corporate Treasury Management article entitled "Pension risk, governance and CFO liability." (My current affiliation is Fiduciary Leadership, LLC.)

The issue of valuation is far from trivial. According to Pensions & Investments, the Society of Actuaries will soon publish a paper that looks at alternative ways to assess public plan liabilities, "reversing a previous position prohibiting any release of the paper."

Stay tuned for more discussions about how to evaluate funding gaps. As I've long maintained, if you can't measure something, you can't manage it.

Valuing Public Pension Fund Liabilities

In 2006, I penned "Will the Real Pension Deficit Please Stand Up?" as a way to draw attention to the urgent need to understand what reported numbers mean. Ten years later, questions remain about how best to measure defined benefit plan obligations. This is not a good situation, especially now when more than a few retirement plans are struggling. Click to review's pension liability and funded status data for eighty plans.

Authors of a Citigroup paper entitled "The Coming Pensions Crisis" urge transparency regarding "the amount of underfunded governmental pension obligations." I concur but the challenge is knowing what information should be disclosed so that legislators, policy-makers, taxpayers and plan participants have confidence in what gets shared. I have often written that is hard to manage a problem if one cannot adequately measure the problem. 

In early July, Pensions & Investments' Hazel Bradford wrote about the Competitive Enterprise Institute's suggestion to use a "low-risk discount rate" tied to U.S. Treasury bond yields. Critics counter that this would grossly inflate the size of a deficit and perhaps lead to inappropriate actions. On August 3, it was reported that two actuarial groups disbanded a task force over the topic of how to best value public pension fund liabilities. (In terms of full disclosure, I co-authored a paper in 2008 with one of the groups mentioned, the Society of Actuaries. Click to read "Pension Risk Management: Derivatives, Fiduciary Duty and Process.")

As someone who has been trained as an appraiser, taught valuation principles and rendered opinions of value or reviewed those of others, I know firsthand that reasonable people can differ about inputs and assumptions. I likewise understand that snapshot pension debt levels do not necessarily convey a message about current or ongoing liquidity, debt capacity or the ability to tax. The goal is to reconcile differences so that anyone making decisions based on valuation numbers understands their strengths and weaknesses. 

Given the goal of this blog Pension Risk Matters to educate and share helpful information about the global retirement industry and investment risk governance, I welcome input from knowledgeable appraisers, accountants and actuaries. If you are interested in being interviewed or writing a guest blog post, please kindly email

Company Worries About Retirement Readiness

According to a new report from Willis Towers Watson, corporations worry that employees cannot afford to leave the labor force on schedule. Fearing higher costs, many employers describe anemic retirement readiness as a "top risk" yet few monitor this on a regular basis. Researchers write "These findings suggest that sponsors have an opportunity to improve the governance of DC plans by increasing the frequency with which they monitor retirement readiness, as specific metrics on readiness would offer sponsors insight on the overall effectiveness of their plan." For a full read of this report, click to download "Unlocking Value From Effective Retirement Plan Governance."

Unfortunately, if results of a new FINRA Investor Education Foundation study reflect widespread reality, Corporate America may have an uphill and expensive battle on their hands. Nearly eighty percent of respondents self-identified as financially literate despite low scores on a quiz they took to test their knowledge. Making matters worse, financial education is a rarity. Six out of ten persons answered "No" when asked "Was financial education offered by a school or college you attended, or a workplace where you were employed?" 

Notably, the 2015 National Financial Capability Study reveals a financial literacy income gap with persons earning less money seemingly in need of greater help. If, as some predict, the U.S. Department of Labor Fiduciary Rule makes it harder for smaller investors to access financial advice, employers may need to pick up the slack. If that occurs, expect companies in search of long-term labor cost savings to incur bigger short-term cash outflows to provide employees with adequate financial education (to the extent allowed).

The takeaway is that retirement plans have a bottom line impact on shareholders. Companies offer programs to attract and retain talent but are mindful of the cost-benefit tradeoff.

More About the Fiduciary Gap

Thanks to the many people who shared their insights about various state retirement arrangements for eligible private company employees and the need for a proverbial umbrella to address the fiduciary gap.

Let me start with the Nutmeg State program since I discussed it in two earlier posts. Interested parties can click to download the final legislation that sets up the Connecticut Retirement Security Exchange. (Note the new name.) Several changes caught my eye.

  • On page 156 of 298, there is a provision that "If a participant does not affirmatively select a specific vendor or investment option within the program, such participant's contribution shall be invested in an age-appropriate target date fund that most closely matches the participant's normal retirement age, rotationally assigned by the program." If "rotationally" means "random," it will be helpful to know how board members identify age cohorts and select (and monitor thereafter) a particular product for each group.
  • Regarding a provision that allows the sitting governor to individually select the board chair without the advice and consent of the General Assembly, a best practice is that the engagement process be transparent. Interested parties want to know that the appointment reflects the right person for the job
  • It would be helpful to know the basis for why the voluntary opt-in for small businesses with more than five employees was removed. After all, forced regulation could end up costing firms so much in terms of paperwork and payroll set-up that hiring plans are put on hold.
  • It would be helpful to know how the three percent default contribution level will be tracked so that legislators will know whether to seek an increase later on. It's a low number, especially given the math for what can be done privately. Suppose a person makes $50,000 per year in wages. The three percent deduction translates into $1,500. In 2016, the IRA contribution limit for someone younger than fifty years is $5,500. Should an individual decide to allocate the maximum, participation in the state program will logically require that the individual go elsewhere to invest the additional $4,000. Why doesn't that individual simply invest the full $5,500 with one reputable organization? I assume the counter argument is that an individual who would not max the annual IRA limit needs a nudge in the form of the state program.

As I wrote in "State Retirement Arrangements for Small Business Employees," there are multiple state endeavors and one would need to examine the details of each one to assess economic impact and pension governance implications. Questions about federal programs exist as well. Putting aside dire long-term projections about the U.S. Social Security Trust Fund, absent reforms, several critics are unhappy with what they see as a fiduciary gap for anyone enrolled in the myRA program. By way of background, there are no fees to the individual enrollee. This is good but the guaranteed return is low because it is tied to federal debt security yields. For June 2016, the number is 1.875 percent APR. There is a lifetime maximum of $15,000 for eligible persons. A person's employer must agree to facilitate automatic deductions which means you must be employed.

One attorney I called today said he did not think there is a fiduciary in place for this federal product. Chris Carosa, editor of Fiduciary News, has another take. In "Does "myRA breach fiduciary duty?" he lays out reasons why he thinks the myRA product is "blatantly ill-suited for retirement savers." He decries the "oozing irony" of political leaders who want the Fiduciary Rule applied to others but not to themselves, adding there is no diversification potential and the selling firm (i.e. the U.S. Treasury) is conflicted by distributing its own product. Another retirement industry professional wants to know "What fiduciary would MANDATE that a twenty-five year old invest his or her retirement assets in a short to intermediate term government bond fund and expect to avoid liability?

You get the picture. We need to understand where the fiduciary gaps exist and then strive to close them as quickly and efficaciously as possible.

State Retirement Arrangements for Small Business Employees

After posting "Public-Private Retirement Plans and Possible Fiduciary Gaps," a senior legal expert kindly informed me that Connecticut's legislation draws extensively from U.S. federal pension law. (ERISA does not directly apply to most government plans and the U.S. Department of Labor has proposed a safe harbor that would exempt states from being tagged as ERISA fiduciaries.) Interestingly, a word search for "fiduciary" in the Public Act No. 16-29 document comes up empty. Specifically, as laid out in Section 6, entitled "Board Duty To Act With Prudence And In Interest of Participants," the Connecticut Retirement Security Authority board of directors are to act with the "care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims" and solely "in the interests of the program's participants and beneficiaries."

Regarding legal redress, my understanding is that individuals who allow their employers to deduct three percent of their taxable wages to be placed in an "age-appropriate target date fund" or similarly allowed investment will not have the right to sue individual members of the Connecticut Retirement Security Authority Board nor will they have the right to sue the State of Connecticut. They will have to rely on authorized directors and the Attorney General to properly oversee selected service providers and take corrective action to improve things going forward. However, even if participants can demonstrate economic harm, they would not be able to recover past damages.

Programs offered by other states vary. One would have to research dozens of legal documents to compare and contrast governance, investment opportunities and conflict of interest avoidance mechanisms. Interested parties can visit the Pension Rights Center's State-based retirement plans for the private sector or the AARP's State Retirement Savings Resource Center. I am not sure how often these websites are updated.

I remain skeptical and am not alone. Michael Barry, president of the Plan Advisory Services Group, explains his reservations in "Are State Plans the Answer?" (Plan Sponsor, November 2015). Paul Schott Stevens, president and CEO of the Investment Company Institute, gives a thumbs up to private initiatives such as expanding multiple employer plans or MEPs to include smaller companies. Another way forward would be to simplify 401(k) plan regulations to encourage employers to better help their workforce save for retirement. See "State-Run Retirement? Better to Go Private" (Wall Street Journal, February 7, 2016).

My lack of enthusiasm for these state-run programs has more to do with philosophy and a desire to encourage economic growth. Here is some food for thought.

  • Small businesses around the world are drowning in a sea of regulations. According to an article in Small Business Trends, there is an inverse relationship between company formations and the number of pages in the Federal Register. These "little engines that could" create jobs are not leaving the train station, discouraged by too many rules.
  • As any free market economist can handily demonstrate, unintended consequences often occur, resulting in added expense and unwelcome behavior. Instead of spending X hours per month on growing sales and profit, a small business owner that is obliged to complete paperwork may now forego hiring new employees or cut back on existing perks.
  • Some of the states that are setting up retirement programs for private company workers have a poor track record as evidenced by underfunded pension plans for municipal staff.
  • Unless one is convinced that small company employees are unable or unlikely to set up an IRA on their own, these state-involved arrangements are not needed. CNBC reports that "Employees participating in auto enrollment tend to contribute less than people who sign up for 401(k) plans on their own, often because their employers set a low default contribution level."
  • It's not clear to me that individuals will have a better level of consumer protection by being part of a state-run program versus setting up an IRA account directly with a reputable financial institution. So far, no one has convinced me to the contrary.

I'm all for encouraging individuals to save for the long-term but I seriously wonder why government has to be involved with every decision someone makes. Hopefully I will be proven wrong and these state programs for private company employees will succeed.

Note: I welcome insightful essays and commentaries on this and other relevant pension governance topics. If you would like to be a guest contributor, please email with your idea or write-up.

Public-Private Retirement Plans and Possible Fiduciary Gaps

Hot off the press, a study from Pew Charitable Trusts ("Pew") examines retirement benefit planning by geography. Key takeaways from "A Look at Access to Employer-Based Retirement Plans in the Nation's Metropolitan Areas" and a summary by Pew's Director of Retirement Savings, John Scott, include the following:

  • At least four out of ten full-time employees work for private companies that do not offer a retirement plan;
  • Where one works can influence whether an individual has access to an employer-provided retirement plan;
  • Data shows that access is lowest in Florida, Texas and California; 
  • Access is typically lower for employees of small companies;
  • Workers who earn more than $100,000 per year generally have greater access to an employer-sponsored plan than individuals who earn less than $25,000; and
  • Underserved employees (in terms of access to a company-provided retirement plan) are clustered in large cities.

These insights validate what many know. Millions of people worldwide are not saving enough by far for retirement. One response (not surprisingly) is for government involvement to encourage individuals to save more. On November 16, 2015, the U.S. Department of Labor ("DOL") announced its proposed regulation to enable states to facilitate retirement plans for uncovered private sector employees without being subject to the Employee Retirement Income Security Act ("ERISA"). Read "State Savings Programs for Non-Government Employees" for details.

As the result of this suggested safe harbor (as I don't believe the DOL regulation has been passed yet), lots of states are jumping on the retirement bandwagon. Besides the State of Washington, California and Illinois require or encourage mostly smaller employers to offer a plan or engage in getting their employees to join a state network.

Not everyone is shouting with glee. According to "Initiatives for private-sector retirement moving to states" by Hazel Bradford (Pensions & Investments, January 25, 2016), certain financial service organizations fear increased compliance costs due to a patchwork approach across fifty states. Another concern is whether participants in newly formed state programs will be adequately protected. Even if a state private-public program is run by those who have sufficient experience and knowledge, will they be held to a fiduciary standard? If not, why not? If so, how will the fiduciary standard compare with ERISA norms if ERISA does not apply? In my discussions with several persons involved in this area, they too share the concern about a fiduciary gap.

Consider the case of Connecticut. After threatening to veto the bill to create the Connecticut Retirement Security Board in mid May 2016, the Nutmeg State's governor signed the act on May 27 with operations planned to commence in 2018. According to the original text for sHB 5591, if an employee does not "affirmatively opt in" then a "qualified" employer must enroll each employee and deduct three percent of taxable wages "up to normal IRS limits." An employee can opt out by indicating a contribution level of zero. The chairperson and other directors of the Connecticut Retirement Security Board will be selected by the governor in concert with the General Assembly. The board members must "act with care and solely in the interests of the program participants" with power given to the attorney general to "investigate violations of this requirement and to seek injunctive relief regarding violations." Board members are to have "protection from individual liability."

I will defer to attorneys to hash the legal niceties about individual state endeavors to assist private company employees. From a governance perspective, I belief strongly that private company employers, plan participants and taxpayers must have answers to critical questions such as those listed below:

  • How will board members be protected? If they are to be covered by some kind of liability insurance policy, who will pay the premiums and determine the adequacy of coverage? Will taxpayers be asked to pay anything if something goes awry and the insurance policy is insufficient?
  • Who will monitor the performance of board members to assess possible conflicts of interest?
  • Will board members be term limited?
  • Will board members be compensated and who will pay their compensation?
  • In the event of a major snafu, do participants have any redress? If so, to whom and on what basis? Litigation? Mediation? Arbitration? Other?
  • When would board members act as fiduciaries? Will their actions be evaluated on the basis of state trust law? If so, how does the state trust law compare to ERISA fiduciary duties? Weaker? Stronger? Same?
  • Would individuals have stronger protection if they transact directly with a financial service company and open up an IRA on their own?

In the aftermath of the passage of the U.S. Department of Labor Fiduciary Rule (acknowledging several legal challenges just filed), the concept of fiduciary duty is foremost on the minds of numerous industry executives and policymakers. Will public-private retirement plans receive the same scrutiny or is there a fiduciary gap? If the latter, who is on the hook in case of a problem?

Fiduciary Certification and Training

Last week, I had the pleasure of speaking to Dr. Anna Tilba with the Newcastle University Business School in the United Kingdom ("UK"). A mutual colleague had suggested we speak since we both work in the governance area. Dr. Tilba has studied the fiduciary practices of investment intermediaries. Her report fed into the UK's Law Commission publication about current fiduciary standards and areas for improvement.

One of the topics that arose during our conversation was the need for adequate fiduciary education and what she referred to as the professionalism of investment stewards. I agree that having experienced and knowledgeable individuals in place is critical. Even if the intent is to outsource certain services to others, investment committee members are tasked with making an informed decision about what to delegate and to whom.

Stateside, the U.S. Department of Labor ("DOL") continues its Fiduciary Education Campaign. Each seminar covers topics such as those listed below:

  • Comprehend the nature of each ERISA plan offered;
  • Apply rigor in selecting and monitoring service providers; and
  • Steering clear of prohibited transactions.

DOL website visitors can access something called the ERISA Fiduciary Advisor for information and answers to questions about duties. It's a tool that should help beginners although the DOL cautions that content is not "intended to be a substitute for the advice of a retirement plan professional."

So far, there is no uniform set of answers to questions such as the following:

  • How should in-house fiduciaries be selected?
  • How should in-house fiduciaries (individually and as a group) be assessed in terms of demonstrating procedural prudence?
  • Should in-house fiduciaries receive a bonus for achieving certain plan-specific goals?
  • Does everyone on an investment committee need to be equally proficient in a particular subject area or should someone serve as a Sarbanes-Oxley type of "financial expert?" 
  • Do in-house fiduciary term limits make sense?
  • How do variables such as plan design and characteristics of the workforce impact the kind of fiduciary education needed?
  • How should training differ for small to medium sized plans as addressed by the "Report of the Working Group on Fiduciary Education and Training?"

The good news is that data exists to benchmark myriad types of retirement plan decisions in terms of process and not just outcomes. Furthermore, there is a large array of training opportunities. Click here to download the "Retirement Plan Professional's Designation & Certification Guide" to learn about several dozen available offerings. Note that this document has a 401k focus. The bad news is that not all programs are created equal in terms of topic coverage. Even if they were sufficiently similar, facts and circumstances for a given retirement plan often dictate the need for specialized training not required elsewhere. 

Although fiduciary training is uneven across plans, sponsors and geographic location, I predict that lawmakers here and outside the United States will eventually impose universal certification requirements for retirement plan fiduciaries. I don't think a "one size fits all" approach to fiduciary training is ideal but political pressures will almost surely prevail. As the collective pension crisis worsens (and I acknowledge that lots of plans are in great shape), participants and taxpayers will want to know who was in charge of troubled schemes and how they made decisions. Proverbial heads tend to roll when voters' wallets shrink.

Fiduciary Rule and Small Businesses

Given the newness of the U.S. Department of Labor ("DOL") Fiduciary Rule, many still have questions about both content and implementation. One such inquiry arose during a workshop I was asked to create for members of the CT chapter of the National Institute of Pension Administrators ("NIPA"). During our discussion, an audience member wondered out loud if small businesses would be sufficiently overwhelmed that they decide to jettison plans to offer benefits to employees. The reasoning is that compliance costs could dwarf any perceived upside associated with creating retirement arrangements for workers.

As we celebrate National Small Business Week from May 1 through May 7, 2016, the issue of disproportionate impact is certainly relevant. As with any regulation, there are winners and losers. Critics have been vocal about what they see as flaws. Last June, the U.S. Chamber of Commerce released a report entitled "Locked Out of Retirement: The Threat to Small Business Retirement Savings" that predicted a fallout for small business owners who "provide roughly $472 billion in retirement savings for over 9 million U.S. households" via SEP and SIMPLE-type IRA plans. Its author, Drinker Biddle & Reath LLP attorney Bradford Campbell, wrote that "Main Street advisors will have to review how they do business, and likely will decrease services, increase costs, or both." As the U.S. Department of Labor Fact Sheet points out, the final rule covers IRAs, 401(k) plans and many other types of employee benefit plans, some of which were already regulated pursuant to the Employee Retirement Income Security Act of 1974.

Talk about deja vu. Investment News just published an article about the Fiduciary Rule effect on small broker-dealers as relates to documentation and other elements of compliance. The author, Attorney Ross David Carmel, worries that the DOL Fiduciary Rule could be catnip to the plaintiffs' bar because it is vague, "with no definition of best interest or reasonable compensation." He adds that increased costs will likely be passed along to consumers. Of course, buyers of any services have the right to decline or go elsewhere if competitors are willing to sell.

Only time will tell how things materialize for companies that rely on IRAs and will therefore be impacted by the Fiduciary Rule. In aggregate, economic consequences could be large if small business compliance hits the bottom line hard. Statistics from the U.S. Small Business Administration website show that 28 million small businesses contribute 54 percent of U.S. sales.

Public Pension Fund Litigation Database

In carrying out research for a client about public pension fund trends, I came across a website called Pension Litigation Tracker. Maintained by the Laura and John Arnold Foundation, this collection of court documents and descriptions of ongoing developments in "pension reform lawsuits" looks to be a helpful resource at a time when there is increased pressure on numerous municipalities to address the challenges associated with underfunded retirement plans, including questions about the constitutionality of benefit arrangements. A drop down menu allows the user to search by state or by topics such as double dipping, increased employee contribution, pension rights and reduced benefits.

As I have discussed extensively in analyses about the impact of pension deficits on the sponsor's ability to raise capital, service debt and/or sustain economic growth, it is no surprise that litigation and regulatory enforcement that alleges either contractual non-performance or fiduciary breach (or both) is growing. Interested readers can download "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz (American Bankruptcy Institute Journal, July 2014). Also visit the Municipal Bond section of the Good Risk Governance Pays website.

These cases have the potential to be large in terms of dollar damages as well as the cost of defense. An example is the class action filed against the Board of Trustees of the Kentucky Teachers' Retirement System by its "75,000 active members, and over 45,000 annuitants."

While emphasizes the legal nature of disputes about benefit reforms proposed by cities and states, it does not showcase the large number of investment-related lawsuits wherein a public pension plan(s) files a 10b-5 lawsuit against the issuer of a security that is owned by the plaintiff, alleging securities fraud. These actions are likewise large and plentiful. More will be said about this topic in a later post.

Fiduciary Standard TV Ads

I have long professed my concern that retirement issues get short shrift when it comes to political speeches and public discourse. I am not talking about industry discussions which occur all the time. I am referring instead to Main Street outreach. Even today, there seems to be scant mention by U.S. presidential candidates about how to strengthen programs like Social Security and reform tax laws to encourage savings. Of course what the pundits call the "silly season" has just begun, with many months of campaigning to go. Imagine my surprise then when, in between news segments this week, several ads appeared on television about impending changes. In one ad, a man and a woman are chatting in a car about their concern that talking to their advisor will become more expensive and they will end up talking to a robot. Another ad showcases a small business owner who worries that new regulations will make it harder for him to keep offering a 401(k) plan to his employees. Viewers are urged to call their lawmakers.

Research suggests that the ads are sponsored by the Secure Family Coalition. Its website lists organizations that include the following:

  • American Council of Life Insurers;
  • Association for Advanced Life Underwriting;
  • Insured Retirement Institute;
  • National Association for Fixed Annuities;
  • National Association of Independent Life Brokerage Agencies; and
  • National Association of Insurance and Financial Advisors.

On the opposite end of the spectrum are groups such the Institute for the Fiduciary Standard. Its website cites advocacy, research and education of the public as ways for "all those willing to help" to get involved.

Regardless of one's stance about the U.S. Department of Labor proposal (and discussions by other regulators and lawmakers), the hope is that further conversations about retirement planning will encourage a long overdue focus on the abysmal state of readiness in this country and around the world.

If ads are hitting the airwaves now, is a Hollywood movie next?

Pension Risk Governance Blog Still Going Strong After Nine Years

Nine years today marked the debut of Since then, I am proud to say that traffic has steadily grown, with continued feedback and suggestions about all sorts of topics. I am deeply grateful to visitors to this independent website for their time and encouragement. While the specific feedback tends to vary by issue or job function, a central theme is clear. Ongoing education about topics such as due diligence, fees, risk management, asset allocation, hedge funds, liquidity and valuation is both needed and desired. In 2015, this award-winning blog will continue its focus on providing objective and helpful information about important subjects that challenge investment stewards and their advisors, attorneys and regulators who oversee the management of more than $30 trillion.

As I point out in "Financial Expert Susan Mangiero Celebrates Ninth Year as Lead Contributor to Pension Risk Governance Blog" (Business Wire, March 25, 2015), "There is never a shortage of subjects to discuss, thanks to ongoing suggestions and contributions from readers and the significant realities of changing demographics, market volatility and new accounting rules."

To date, there are over 900 published analyses, research updates and guest interviews that can be readily accessed by category and keyword. Simply click on the Archives section of For a complimentary subscription to this blog, as posts are published, click here to sign up. Click here to read our Privacy Policy. If you are interested in contributing an educational essay or letting us know about a relevant news item or rule change, please email

Until the next blog post, thank you for your interest!

Not Everyone Gets a Pot of Gold at the End of the Rainbow

On March 17, the Irish and "Irish-at-heart" happily celebrate St. Patrick's Day, wear the green and look forward to a productive twelve months, after which the festivities can begin anew. Yet March 17 this year brought gloomy headlines for some individuals. In "New pension scheme will see teachers work to 68 in Northern Ireland," Belfast Telegraph journalist Rebecca Black writes that critics of a newly approved plan to increase employee contributions and push back when an educator can retire will make life difficult for new entrants to the job market. For the one out of five teacher graduates who are able to secure employment, they will be asked to pay "9.6%, well above the rate for a civil service pension, and with employer contributions of 13%, well below the rate for a civil service pension." Beyond changes to benefit terms, there are some who offer that teachers burn out by their late 50's and that's why "Most teachers retire by 60." Being asked to work for almost a decade more could be a real hardship.

In the United States, multiple public employee retirement plans have been or are in the process of being examined, restructured, reduced or otherwise reformed. Kentucky State legislators just voted to create a task force to investigate how best to close a funding deficit. As of mid-year, the gap "stood at $14 billion." This step came in the aftermath of a decision not to issue $3.3 billion in pension obligation bonds. See "Senate passes bill to study state's underfunded teacher pension plan" (KY Forward, March 11, 2015).

The State of New Jersey had similarly set up a task force to provide insights into current funding woes and recommend how to move forward. In "A Roadmap to Resolution" (February 24, 2015), the New Jersey Pension and Health Benefit Study Commission urges the freezing of existing retirement plans, the creation of a cash balance plan instead and a unification of benefit plan management to encompass both state and local municipal obligations.

Accounting changes will likely accelerate a further in-depth examination of other retirement and health care plans. According to "Why Some Public Pensions Could Soon Look Much Worse" (Governing, March 17, 2015), recent accounting rule changes - promulgated by the Governmental Accounting Standards Board ("GASB") - force dozens of plans to report "dramatic changes" that reveal significantly larger deficits. Using 2013 and 2014 data, magazine researchers examined 80 public plans in an effort to quantify the impact of using GASB 25 versus GASB 67. The results are telling. Click here to see for yourself how much of a difference ensues due to the now prevailing reporting regime.

As state and municipal plans seek to close serious funding gaps, participants may gasp if they are asked to pay more or receive less or both, making the proverbial gold at the end of the retirement rainbow a challenge.

Report Card For Teacher Pension Plans

According to "Doing the Math on Teacher Pensions: How to Protect Teachers and Taxpayers," just published by the National Council on Teacher Quality, "state teacher pension systems had a total of $499 billion in unfunded liabilities" in 2014, up by $100 billion since its 2012 study. On a gloomy note, they add that "the debt costs spread out across the K-12 student population amount to more than $10,000 per student and growing." This can only be seen as bad news for beleaguered municipalities with tight budgets.

Concurrent with funding pressures, researchers explain that numerous state sponsors "are also making it harder for teachers to receive benefits." Sprinkled throughout the report is a reference to fairness (or lack thereof) and limited flexibility, with occasional references to the advantages of offering a defined contribution plan to eligible educators. Few defined benefit plans were identified as being sufficiently portable or moderate in terms of what teachers were asked to contribute. Another cited flaw was the factoring of years of service instead of age only as a determinant of when one could retire. Long vesting periods and restrictions as to when employer contributions could be withdrawn by employees are other weak spots. The inability for teachers to purchase service credits for "prior teaching or approved leave" led to poor rankings for some states.

With a pension grade of A, Alaska tops the list. Mississippi lags with a pension grade of F. Too many states for comfort had a C, C-, D+ or D assessment. Fourth from the bottom is Kentucky with a grade of D-, accounting perhaps for its headlines about legislative reform. In "Ky. lawmakers demand reforms to teacher pension plan" (Louisville Courier-Journal, January 1, 2015 ) reporter Mike Wynn tallies unfunded liabilities at $14 billion, "on top of the $17 billion funding gap at Kentucky Retirement Systems." It is no surprise that the Bluegrass State is under pressure to implement change. In addition, a putative class action suit has been filed by a local history teacher against the Kentucky Teachers' Retirement System, "alleging their administrators have been negligent in protecting teachers' pensions from chronic underfunding by the state and bad investments..."

With low scores, large financial gaps and investment risk-taking on the rise for more than a few state teacher retirement plans, somebody may have to stay after school and write "I will change" one hundred times.

Pensions and Bankruptcy Claimants

The tug of war continues between pension plan participants and outside creditors. As a result, doing business with troubled municipalities may end up costing creditors time, money and headaches. Just a few days ago, Judge Christopher Klein with the United States Bankruptcy Court for the Eastern District of California ruled against Franklin Templeton Investments. By doing so, this asset manager will not be able to recoup the $32 million it sought from the City of Stockton as the municipality seeks to exit bankruptcy. Instead, as Reuters journalist Robin Respaut writes in "Holdout creditor in Stockton bankruptcy denied higher claim" (December 10, 2014) the city's plan would give Franklin "just over $4 million of the $36 million it said it is owed." This follows an October thumbs-up from the Court to reduce the payout to bond investors in order to maintain retirement and health care benefits and thereby (hopefully) prevent an exodus of badly needed city workers. 

A topic not actively discussed but critically important to ignore is that once-burnt lenders are unlikely to come knocking again. If they do, they will charge a higher cost of capital and demand tighter collateral safeguards to reflect the bigger risk associated with exposure to struggling borrowers. After all, lenders are accountable to their customers. As Bond Buyer's Keeley Webster describes, investors in Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund will suffer as the result of a low recovery rate in the neighborhood of twelve percent for loans made to Stockton. 

As Attorney B. Summer Chandler discusses in "Is It 'Fair' to Discriminate in Favor of Pensioners in a chapter 9 Plan?" (American Bankruptcy Institute Journal, December 2014) putting pensioners ahead of other unsecured creditors may not seem right to some but could be supported by "limited case law assessing chapter 9 plans..." taking into account "the unique nature of a municipality, its relationship to its citizens (including pensioners and current employees) and the purposes of chapter 9..."

To reiterate, customer risk is real for organizations such as Franklin Templeton. Unless its higher costs can be passed along to customers, expect some lenders and suppliers to say "never mind" and look elsewhere for business. This would logically reduce the supply of capital and services and could mean higher costs for all municipalities, not just those seeking bankruptcy protection. As my co-authors and I discuss in "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz (American Bankruptcy Institute Journal, July 2014), the evolution of decision-making can reduce uncertainty. We add that ", economic and political skirmishes associated with municipal bond distress now being played out are helping to set the stage for future clarity." We assert that future bond buyers may still lend to a municipality if they "are comfortable in their belief that large unfunded post-employment obligations can be compromised as part of a distressed-debt workout..." and that "fresh capital can be a lifeline for a municipality that has fallen on hard times, even if it comes with a higher service cost.'

The best outcome is that pension-plagued municipalities seeking to exit from bankruptcy get their financial house in order as quickly as possible. While retirement plan participants have received a reprieve in some situations such as what happened with Stockton, the overall funding crisis is likely to reverberate in ways that could lead to future skirmishes. Witness what is happening right now, courtesy of the U.S. Congress. According to "Pension Bill Seen as Model for Further Cuts" (December 14, 2014), Wall Street Journal reporter John D. McKinnon portends future diminutions in employee benefit payouts if such action is deemed to prevent the "failure of just a few" plans being able to destroy "the federal pension safety net" (i.e. the Pension Benefit Guaranty Corporation). While the focus of lawmakers right now is on corporate union plans, it is not much of a stretch to imagine certain reductions being allowed throughout the United States and in other countries, postured as protection for the "greater good."

Taxpayer Bailout of Underfunded Pension Plans

Over dinner last night with friends, my husband told a joke about Kim Kardashian and Paris Hilton (or whomever you want to designate as fact-challenged individuals). The hotel heiress asks "Which is closer to us - Florida or the moon?" The reality star replies - "Hello, can you see Florida from here?" Unfortunately, this type of silliness has reared its head often over the years with regard to the topic of promising too much and funding too little. The math just does not work. To the logical observer, this flight of fantasy was always destined to self-destruct. It was more a question as to how long the downward spiral would take for impacted U.S. and non-U.S. government plans.

On July 27, 2006, I wrote "Tea Party Redux: State Pensions in Turmoil." It was blatantly clear that trouble was heading our way. Since then, headlines about retirement plan gaps continue to dominate the news.

In what could be a bellwether situation, the State of Illinois wants to address a shortfall that is referred to as "the biggest in the U.S" and is fighting the court system to be empowered to do so. See "Illinois Fights Court Block of $111 Billion Deficit Fix" by Andrew Harris (Bloomberg, November 27, 2014). In "Why Illinois pension reform may be constitutional" (Crain's Chicago Business, December 6, 2014), Joe Cahill explains that "important state interests" may justify the limiting of pension contracts that are deemed constitutional and therefore inviolable. He references Felt v. Board of Trustees. Those who disagree that reform is legally possible suggest that taxpayer hikes and/or reduced overall municipal spending are inevitable.

Now it appears that U.S. lawmakers may have their sights set on private pension plans too. In "Congress could soon allow pension plans to cut benefits for current retirees" (December 4, 2014), Washington Post journalist Michael A. Fletcher describes a move that, if enacted, would see lower payouts for plan participants of multi-employer plans in distress. The alternative is to have the Pension Benefit Guaranty Corporation ("PBGC") take over any failed plans. As stated in "Solutions not Bailouts" (February 2013), Randy G. Defrehn and Joshua Shapiro write that benefits would be lowered anyhow in the event of a PBGC assumption of plans deemed as insolvent. In "The lame-duck Congress plots to undermine retiree pensions," Los Angeles Times reporter Michael Hiltzik urges readers to stay tuned as the December 11, 2014 vote on an omnibus spending bill may contain language that, if passed into law, would snip dollars from union retirement arrangements. He quotes advocates of defined benefit plans as pushing for careful deliberation instead of rushing ahead.

Expect lots of changes in 2015 and thereafter. The pension crisis (at least for some sponsors and their employees) is not going away anytime soon. In the meantime, smart cookies are invited to the negotiations table. The worst thing that could happen is to ignore reality. Leave that to Kim and Paris. 

Longevity Trends and Pension Costs

When it comes to estimating defined benefit ("DB") plan costs, it is critical to use inputs and assumptions that make sense. Longevity is one such important factor that demands attention. Getting good answers to questions about life span differences among age, income and health cohorts is necessary for decision-makers. The assessment of how to redesign a plan, transfer risk and/or modify investment strategy depends on knowing what variables determine the size of the liability.

Studies such as the one just released by the National Association of Pension Funds ("NAPF") and Club Vita (a Hymans Robertson Company) can be helpful to the extent that they shed light about how long participant groups are expected to live. In a November 27, 2014 joint announcement, its "unique" research is described as likely to result in companies having to report higher pension liabilities. Based on an assessment of data about 2.5 million pensioners and one million deaths, authors conclude that "the pace of longevity increases varies significantly within DB schemes and for different groups of DB pension scheme members." One inference is that the life span gap between men and women in the "hard pressed" economic category versus those who are "comfortable" is narrowing. A second finding is that a typical defined benefit plan liability is likely to rise by one percent.

As the researchers correctly point out, access to granular details about the sensitivity of the cost-demographic lever can be utilized by DB plan trustees when deciding if and how to restructure via a buy-out, liability-driven investing strategy or something else. Click to read "The NAPF Longevity Model" (November 2014).

Public Plans For Private Sector Employees - Say Whaaat?

The news about public retirement plans for private workers may not be as snappy as a dog with red sunglasses taking a selfie but it sure caught my attention.

On June 17, 2014, Pensions & Investments reported that efforts are underway to "provide retirement security for all New Yorkers - not just participants in the $150 billion New York City Retirement Systems." In "NYC comptroller to launch advisory panel for retirement security," writer Robert Steyer tells readers that Chief Investment Officer Scott Evans will lead the group, with members yet to be appointed. The Nutmeg State is on the same glide path with its creation of the Connecticut Retirement Security Board. Michelle Chen of The Nation applauds this initiative while Bill Cummings of the Connecticut Post decries the costs that small business owners will bear if a mandatory offering occurs.

In "State-based retirement plans for the private sector" (August 6, 2014), the Pension Rights Center lays out legislative happenings elsewhere as part of a "movement afoot to use the efficiencies of public retirement systems to administer new types of pension plans for private-sector workers." The list includes Arizona, California, Colorado, Illinois, Indiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, Ohio, Oregon, Vermont, Washington, West Virginia and Wisconsin.

Certainly there is merit for any effort that helps to promote savings and financial independence. That said, there is a plethora of critical questions to be answered before any products are developed, let alone forced on taxpayers and employers. For one thing, who will serve as a fiduciary for each plan and what regulatory regime will prevail? ERISA does not extend to government plans. Will state trust law apply? Second, some of the aforementioned states are struggling with underfunded plans for municipal workers. If said deficits are revealed as the result of questionable investment and benefit mix decisions and/or limited oversight, does it make sense to put these same persons in charge of a new plan? Third, to the extent that state funding is used to install these new plans, how will fiscal policy change as a result? Fourth, are there true efficiencies to exploit and in what areas - investment, operational, technology, etc?

Maybe state delivery of private retirement benefits makes sense but I hope that a lot of important issues get vetted before too much big spending takes place.

Pensions, Politics and the ERISA Fiduciary Standard

Thanks to the folks at the Mutual Fund Directors Forum for disseminating a January 13, 2014 letter from members of the New Democrat Coalition to the Honorable Thomas Perez, Secretary of the U.S. Department of Labor ("DOL"). The gist of the four-page communication is that these members of the current U.S. Congress would like to see regulatory coordination in order to "protect investors while reducing confusion." They add that they are still concerned that a new version of the fiduciary standard, when proposed anew, might discourage plan participant literacy and disclosures. The worry seems to be that individuals with low or middle incomes as well as small businesses could be adversely impacted, depending on the ultimate version.

According to the Securities Industry and Financial Markets Association ("SIFMA") website, Republicans have likewise communicated their concerns to the U.S. Department of Labor as well as the Office of Management and Budget. These ranged from "the impact on an individuals' choice of provider to potential unintended consequences limiting access to education for millions of individuals saving for retirement." Click to access SIFMA's DOL Fiduciary Standard Resource Center.

On October 29, 2013, the Retail Investor Protection Act (H.R. 2374), sponsored by U.S. Congresswoman Ann Wagner (Republican, 2nd District of Missouri), was approved by the United States House of Representatives in a vote of 254 to 166. According to the Gov Track website, U.S. Congressman Patrick Murphy (Democrat, 18th District of Florida) joined as a co-sponsor on September 19, 2013. The stated legislative intent is to preclude the "Secretary of Labor from prescribing any regulation under the Employee Retirement Income Security Act of 1974 (ERISA) defining the circumstances under which an individual is considered a fiduciary until 60 days after the Securities and Exchange Commission (SEC) issues a final rule governing standards of conduct for brokers and dealers under specified law." It further prevents the SEC from implementing a rule "establishing an investment advisor standard of conduct as the standard of conduct of brokers and dealers" prior to assessing the likely impact on retail investors. Click to read more about the Retail Investor Protection Act. Click to read the mission of the United States Department of Labor which states "To foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights."

As I have repeatedly predicted in this pension blog and elsewhere, the retirement crisis, not just in the United States but around the world, is increasingly showing up as a political hot button issue. No one wants to lose votes from retirees who are struggling and employees who cannot afford to stop working any time soon. In his State of the Union address, U.S. President Obama described a new type of retirement account, i.e. "myRA," that is meant to help millions of individuals whose companies do not offer retirement plans. See "What you need to know about Obama's 'myRA' retirement accounts" by Melanie Hicken (CNN Money, January 29, 2014). More details will no doubt follow.

There is a lot we don't know about how politics will impede or enhance the state of the global retirement situation. As a free marketeer, I am not particularly optimistic about new rules and regulations that prevent an efficient supply-demand interaction from taking place. However, this is a lengthy topic and the hour is late so I will leave a discussion about the positive and normative aspects of capitalism for another day.

De-Risking, HR Strategy and the Bottom Line

In case you missed our December 10, 2013 presentation about pension de-risking, sponsored by Continuing Legal Education ("CLE") provider, Strafford Publications, click to download slides for "Pension De-Risking for Employee Benefit Sponsors." It was a lively and informative discussion about the reasons to consider some type of pension risk management, considerations for doing a deal and the role of the independent fiduciary. The transaction and governance commentary was then followed with a detailed look at ERISA litigation that involves questions about Liability Driven Investing ("LDI"), lump sum distributions and annuity purchases.

Some of the issues I mentioned that are encouraging sponsors to quit their defined benefit plans in some way include, but are not limited to, the following:

  • Equity performance "catch up" from the credit crisis years and the related impact on funding levels, leading some plans to report a deficit;
  • Need for cash to make required contributions;
  • Low interest rates which, for some firms, has ballooned their IOUs;
  • Increased regulation;
  • Higher PBGC premiums;
  • Rise in ERISA fiduciary breach lawsuits;
  • Desire to avoid a failed merger, acquisition, spin-off, carve-out, security issuance or other type of corporate finance deal that, if not achieved, could lessen available cash that is needed to finance growth; and
  • Difficulty in fully managing longevity risk that is pushing benefit costs upward as people live longer.

While true that numerous executives have fiduciary fatigue and want to spend their time and energies on something other than benefits management, it is not always a given that restructuring or extinguishing a defined benefit plan is the right way to go. Indeed, some sponsors have reinstated their pension offerings in order to retain and attract talented individuals who select employers on the basis of what benefits are offered.

Given what some predict as a worrisome shortage of talented and skilled workers, the links among HR strategy, employee satisfaction and the bottom line cannot be ignored. For those companies that depend on highly trained employees to design, produce, market and distribute products, the potential costs of losing clients to better staffed competitors is a real problem. According to the "2013 Talent Shortage Survey," conducted by the Manpower Group, "Business performance is most likely to be impacted by talent shortages in terms of reduced client service capability and reduced competitiveness..." A report about the findings states that "Of the 38,618 employers who participated in the 2013 survey, more than one in three reported difficulty filling positions as a result of a lack of suitable candidates; the 35% who report shortages represents the highest proportion since 2007, just prior to the global recession."

As relates to the well-documented shift by companies and governments to a defined contribution plan(s), I recently spoke to a senior ERISA attorney who suggested a possible re-thinking of the DB-DC array, based on discussions with his clients. The conclusion is that a 401(k) plan is sometimes much more expensive to offer than anticipated. For employees who lost money in 2008 and beyond and cannot afford to retire, they will keep working. The longer they stay with their respective employer, the more money that employer has to pay in the form of administration, matching contributions, etc.

A plan sponsor has a lot to consider when deciding what benefits to offer, keep, substitute or augment. Dollars spent on benefits could reap rewards in the form of a productive and complete labor force. With full attribution to the seven fellas in Disney Studio's Snow White, will your employees be singing "Heigh-ho, heigh-ho, it's off to work we go" or will they instead bemoan their stingy boss and search for a new work home, with better economic lollipops, thereby leaving a business deprived of precious human capital?

Some U.S. Senators Seek to End Traditional Pensions For New Federal Employees

Whenever I am in New York City and have a chance to walk down Fifth Avenue, I marvel at the number of stores that have been "going out of business" for years. They advertise change and nothing happens. Many people feel the same way about government programs. Once they breathe life, it is hard to extinguish a federal promise unless there is an urgent reason to stop. Several U.S. Senators think the time is now to truncate one such program.

According to "Senators Propose to End Defined Benefit Pensions for New Federal Employees" by reporter, Ian Smith (November 13, 2013), the Public-Private Employee Retirement Parity Act (S. 1678) would maintain the Thrift Savings Plan (along with the current match up to 5%) for existing and new federal employees but jettison the traditional retirement compensation component. Members of Congress would likewise take it on the chin. Sponsors Richard Burr (R-NC), Tom Coburn (R-OK) and Saxby Chambliss (R-GA) assert that individuals who work for the U.S. government "receive far more generous retirement benefits than private sector employees. The cost to taxpayers of these benefits is unsustainable and we simply cannot afford it."

Not surprisingly, federal workers are none too happy. They counter that their sacrifices are already large. In "Congess could wring $300B in deficit savings from federal pay, pension changes," Jack Moore (Federal News Radio, November 15, 2013) describes a series of proposed changes, including increased contributions from employees. These would be in addition to a pay freeze already in place.

As with discussions about retirement plan reform throughout the country, federal workers complain that they are paying for the deficit sins of others. Unfortunately, that does not negate large and real problems. According to the Office of Personnel Management, the Federal Employees Retirement System or FERS recorded a $20.1 billion gap in funding at fiscal year end 2011. This marked a serious turnaround from its estimated $12.2 billion surplus at fiscal year end 2010. See "Federal pension systems' unfunded liabilities skyrocket" by Stephen Losey (Federal Times, February 20, 2013).

Keep in mind that older workers at one point had a choice to be either part of the Federal Employees Retirement System ("FERS") or the Civil Service Retirement System ("CSRS"). While newer workers can only be part of FERS, the funding issues for the legacy program are challenging at best. According to "Federal Employees' Retirement System: Budget and Trust Fund Issues," Katelin P. Isaacs with the Congressional Research Service (June 13, 2013) explains that, since its inception in 1920, the CSRS was structured as a pay-as-you-go program. In 1956, Congress mandated federal agency employers to make contributions on behalf of working participants.  Employees made contributions too but they have been insufficient to "pre-fund the future retirement benefits of federal employees." The likely outcome, absent reform, is a reduction of pension benefits or a rise in what employees must contribute going forward.

Said another way, federal workers are confronted by similar difficulties that many of us in the private sector cannot ignore. Planning for an early and bountiful retirement is becoming a veritable quest for the hard-to-grasp brass ring.

Labor Force Shrinks - Hurts Economy

Labor Day always marks an assessment of where things stand with the state of employment (or unemployment as the case may be). This year is no different except that the news continues to get worse with respect to how many people are contributing to the country's bottom line.

According to MarketWatch contributor Irwin Kellner, the unemployment rate is a poor substitute for knowing whether people are ready, able and willing to work. In "Labor pains - don't count on jobless rate" (September 3, 2013), the point is made that the participation rate is at an all-time low. Excluding military personnel, retired persons and people in jail, fewer adults than ever before in the history of the United States are pursuing work. One reason may be that schools are not preparing young people to assume jobs that require a certain level of skills. Another reason is that being on the dole is a superior economic proposition for some individuals. Yet another factor is that long-term unemployed persons are too discouraged to keep going.

Indeed, I wonder if there is a productivity tipping point, beyond which a person says "never mind" to gainful employment. Certainly people with whom I have spoken talk about the need to work many more years beyond a traditional retirement age. However, they are quick to add that they enjoy what they do and sympathize with those persons who have jobs they loathe or are hard to do after a certain age. Some people simply believe that going fishing on other people's dime, as a ward of the state, is a rational response to current incentives.

The numbers are gigantic and that should put fear in the hearts of those who are pulling the economic wagon. According to labor expert Heidi Shierholz, "More than half of all missing workers - 53.7 percent - are 'prime age' workers, age 25-54. Refer to "The missing workers: how many are there and who are they?" (Economic Policy Institute website, April 30, 2013). The Bureau of Labor Statistics, part of the U.S. Department of Labor, estimated in July 2013 that there are 11.5 million unemployed persons, of which 4.2 million individuals fall into the long-term unemployed bucket since they have been out of work for 27 weeks or longer. Click to review statistics that comprise "The Employment Situation - July 2013."

The combination of no job and an anemic retirement plan, if one exists at all, are harbingers of doom for taxpayers and for plan sponsors that are under increasing pressure to help their employees. Mark Gongloff, the author of "401(k) Plans Are Making Wealth Inequality Even Worse: Study" (Huffington Post, September 3, 2013) describes a recent study that has the wealthiest Americans with "100 times the retirement savings of the poorest Americans, who have, basically no savings."

My predictions are these. Even if you are a rugged individualist who keeps a tidy financial house, you will be paying for the economic misfortunes of others. Taxes are destined to rise, benefits may fall and you will likely have to work for a long time to pay for this country's dependents. Retirement plan trustees, whether corporate or municipal, will be under increased pressure to make sure that dollars are available to pay participants, regardless of plan design. In lockstep with expected changes in fiduciary conduct, ERISA and public investment stewards could face more enforcement, scrutiny and litigation that asks what they are doing and how.

Pension Plan Economics and Corporate Finance

Just published is an article I wrote about the urgent need for appraisers and deal-makers to make sure that they have adequately assessed the economics associated with defined benefit plan funding. Entitled "Pension Plans: The $20 Trillion Elephant in the (Valuation) Room" by Susan Mangiero (Business Valuation Update, July 2013), the objectives of this article are threefold: (1) shed light on the magnitude of the pension underfunding problem and the possible dire impact on enterprise value; (2) remind appraisers of the need to thoroughly understand and evaluate pension plan economics or engage someone to assist them; and (3) explain the adverse consequences on deal-making and corporate strategy when pension plan funding gaps are given short shrift. CEOs, Chief Financial Officers, private equity, venture capital, merger and acquisition and bank lending professionals will want to read this article as it showcases this timely and urgent topic.

Click to read my article about pension plan valuation.

In a related post, ERISA attorney Stephen D. Rosenberg wrote a commentary on his "Boston ERISA & Insurance Litigation Blog" (June 17, 2013) about why he believes that appraisers should not be designed as ERISA fiduciaries. He expresses doubt about whether imposing a fiduciary standard on appraisers will "improve the analysis provided to plan fiduciaries." He suggests that such a move by regulators could create a reluctance for valuation professionals to assume the liability associating with appraising a company with an ERISA plan.

For those who missed our program about appraiser liability, visit the Business Valuation Resources website to obtain a copy of "Valuation and ERISA Fiduciary Liability: Traps for the Unwary Appraiser." The program took place on May 14, 2013. Speakers included myself (Dr. Susan Mangiero), ERISA attorney James Cole with Groom Law Group and Mr. Robert Schlegel with the Houlihan Valuation Advisors.

Pensions and Politics

I have a favorite shirt that gets a few laughs when I wear it. The message is "Change is good. You go first." That is how I feel when I hear pundits talk about the future of pensions and the need for reform. What I continue to believe and have said many times in the last ten years is that the retirement issue is getting closer to the point of no return. Politicians will jump in to allegedly save the day. Part of the problem is that there is a battle of interests with few constituencies aligned to move in the same direction. When this occurs, a central authority typically intervenes.

On May 2, 2013, one speaker who presented as part of the "Bloomberg Forum on Pension Reform" called the situation "desperate." Another speaker said that he is optimistic that the U.S. Congress is proceeding apace with relevant reform. Another speaker hinted at inevitable higher premiums to be paid by plan sponsors to the Pension Benefit Guaranty Corporation ("PBGC"). Comments were made that some underfunded plans will have to materially cut retirement benefits in order to survive.

People are starting to ring the alarm bells. In its 2013 Retirement Confidence Survey, the Employee Benefit Research Institute ("EBRI") found that only 13 percent of workers feel "very confident" about the ability to enjoy a comfortable retirement. That means that 87 percent of workers do not feel confident. Click to see the results of the 2013 Retirement Confidence Survey.

It is unclear how much power voters will have to effect movement as relates to retirement reform such as tax incentives to save, especially when the issue is seldom discussed as part of political campaigns. That could change over time.

When I recently took my 22-year old nephew out to lunch, we talked at length about his views on the budget. He has no debt and has found a job but he knows that many of his peers are not so fortunate. They are graduating with large school loans, have not found a job and are sleeping on mom's couch. These "boomerang" kids are growing in numbers around the world. While they may not be an economic force right now, they vote. At the polar opposite end in terms of desire for how the system should change, if at all, retirees vote as well.

How will politicians respond to younger persons who do not want to shoulder the high costs of social safety net programs and seniors who want them?

Politics and pensions may not make for strange bedfellows after all. As a champion of free markets, I am not particularly happy about the prospect of a "one size fits all" law(s) that seeks to create a national retirement system and/or levies tax penalties for those who wish to save more than $3.4 million or whatever level is deemed "too much." Think higher compliance costs, perverse incentives, the law of unintended consequences, moral hazard and the loss of flexibility. Unfortunately, with disparate owners who each want different things, something will have to take place soon. Many of the retirement piggybanks around the world are close to empty.

Yahoo and Moms Gone Wild - How Will Shareholders Respond?

On February 24, I blogged about Yahoo's just-issued memo to employees. The message from the top is to get your shoes on and be seen in the office. See "What Companies Are Doing About Working at Home."

Jump ahead a few days later and mom blogs are chockablock with negative comments. Kristin Rowe-Finkbeiner and Joan Blades, co-founders of MomsRising, issued a press release that denigrates the decision to ban telecommuting. They go on to describe the role of female workers as critical to the majority of families that require two incomes to pay bills. Their primary argument is that talented workers will go elsewhere in search of flexibility and a chance to stay on the fast track without being forced to sacrifice time with family. (Elsewhere, some suggest that Yahoo may have designed this pseudo layoff without having to officially let go of people.) Direct from Cafe Mom Studios, Amy Boshnack asks lots of women for their two cents. "Backward" was one mother's description of the new policy, especially for a technology company. Several women said that they understood the need for in-person brain storming but said that commuting four or five hours a day from a rural location is neither realistic nor productive for those individuals who live far away. Click to view the video discussion on

Moms are not alone in their dissent. NBC News reports that some might interpret this edict as "anti-parent." Others counter that mothers and fathers could win by being forced to accept a more traditional schedule in the office since telecommuting arguably encourages "creep" with emails and phone calls occurring well after 5 pm. Founder of the Virgin Group, Richard Branson, decries the move as "perplexing" and not compatible with a well-connected labor force and a modern work day that no longer spans 9 to 5. See "Give people the freedom of where to work" by Richard Branson (February 25, 2013).

In the end, the decision will likely be deemed successful (or not) if it makes it easier for the company to go where the CEO, Marissa Meyer, and other Yahoo board members want to be. There are numerous moving parts. Indicting this or any other policy per se is hard. One must consider (1) job descriptions and the need for on-site dealings (2) the economics of working together face to face versus the cost savings of having fewer and/or smaller offices (3) strategic objectives of the firm (4) company morale and much more.

My prediction is that we will see a lawsuit or two for any workers who were contractually allowed some latitude with respect to how, when and where they work. If that occurs, the cost of a lawsuit(s) will not be welcome news to the 71% of institutional and mutual fund owners of Yahoo (ticker is YHOO) stock.

What Companies Are Doing About Working at Home

According to All Things Digital, uber technology journalist Kara Swisher writes that Yahoo is calling remote employees back to the office. Should they say "no," they are invited to consider employment elsewhere. You can read her February 22, 2013 article by clicking on "Yahoo CEO Mayer Now Requiring Remote Employee to Not Be (Remote)." Click to read the original Yahoo memo that emphasizes the need for the kind of communication and collaboration that allegedly disappears when the work force is scattered throughout the world.

While the official text is interesting, a read of the 172 comments (as of February 24, 2013) are telling. Some suggest that Yahoo is likely to send talent packing at a time when smart and productive people are needed. Besides the fact that certain employees may have been promised a work-at-home arrangement and are not happy about a reverse decision, others may simply find it prohibitively expensive to live closer to Yahoo headquarters or too time-consuming to commute several hours each way from places where real estate is more affordable. At a certain point, individuals could be better off making less money in exchange for a shorter commute. Ask anyone who has regularly traveled into New York City or other cities for many years. A daily dose of driving, training and walking for three to five hours round trip can take its toll. Others offer that professionals who are well suited for telecommuting because they like freedom and flexibility will bristle at the structure of having to show up in person. Then there is the argument that telecommuting enhances productivity, especially if it means that a quiet home versus a noisy office allows for fewer interruptions to one's work flow and facilitates the kind of concentration required for complex problem-solving.

It will be interesting to monitor whether Yahoo's new policy to work on site at one of its locations pays off for shareholders. It certainly seems to differ from what I am hearing in the workplace. In the last few months alone, executives from two major insurance companies told me that many of their employees are being forced to telecommute and that physical offices will be replaced with a hotelling arrangement for days when they travel to a company location.

Unlike Yahoo, the message being sent by those who advocate telecommuting is to leave those family photos at home. Use technology to shave off "bricks and mortar" expenses and take a coffee break on your own time.

Significant Talent Shortage Predicted

Notwithstanding recent headlines about job losses at Hostess Brands, UBS and elsewhere, a new study by McKinsey suggests that global businesses are about to face an unprecedented talent shortage in just a few years. According to "Talent tensions ahead: A CEO Briefing" by Richard Dobbs, Susan Lund, and Anu Madgavkar (November 2012), many individuals have prospered due to a "world is flat" application of technology and freer trade practices but may now find themselves part of a grab for increasingly scarce talent. Their position is that the notion of sustained growth due to productivity advances "appears to be reaching its limits" because too many jobs require skills and education and there are too few qualified people to hire. They assert that "by 2020, the world could have 40 million too few college-educated workers and that developing economies may face a shortfall of 45 million workers with secondary-school educations and vocational training." It could be worse for developed economies, with "up to 95 million" people being left out of the hiring equation because they are deemed incapable of handling the work.

If the authors' predictions are correct, this situation would make for a seismic shift in economic and political harmony (or lack thereof) around the world. People who want a job may go begging for a long time while a limited supply of those who can will continue to out earn those who cannot. History has already taught us that greater income inequality often leads to social unrest which in turn manifests itself in the form of new laws that penalize the "rich" and impede growth. The ensuing cycle is not helpful.

Besides the macro implications, most hard-working people embrace a philosophy that allows for achievement and possibilities. A large and mobile middle class is a good thing. The report writers urge business leaders and legislators alike to understand talent imbalances and address them accordingly.

Many posit that a radical assessment of what skills are necessary to succeed is long overdue. A college education is not always the answer. Occupational training may better suit some persons.

Of course, where there is tumult there is always opportunity. According to statistics provided by GSV Advisors, in the "Education Sector Factbook 2012," the global education industry (in terms of dollars spent) totaled over $4.5 trillion with a projected increase in size to $6.4 trillion by 2017. As a former college professor and now a managing director with FTI Consulting in the Forensic and Litigation consulting practice, Dr. Susan Mangiero adds that "learning is a lifetime endeavor. It is critical that an individual stay on top of what skills are needed to remain relevant in one's career. This focus on continuing education can be a boon for companies that recognize the need for specialized training."

A New History For U.S. Pension Funds

As many Americans celebrate the Fourth of July with sparklers and picnics, it is notable that public pension plans in the United States are undergoing radical changes. From their original inception as rewards for civil servants and military personnel, retirement plans are often now seen as costly drains on municipal and state coffers.

A few days ago, the Atlanta City Council voted unanimously to reform its pension plan and thereby "generate $22 million to $30 million in savings over the next 10 years and $500 million over the next 30 years."

Jurists in Colorado and Minnesota recently said "no" to public retirees who sued to reinstate reduced benefits on the basis of alleged contractual guarantees.

While Monday is an official day off for many individuals, it's back to work on Tuesday July 5 with continued debates in town halls throughout the nation (and abroad) about employee benefit plans.

Related Links For Readers:

Pension Crisis - Fact or Fiction?


With all the brouhaha about pension problems around the world, it is worth noting who is being held accountable for the woes and who is identified as being able to implement solutions. The results to date are intriguing to say the least and showcased below. Click to take the pension survey and add your voice. We will run the survey for awhile longer and then report final numbers.

  • Nearly 70 percent of respondents strongly agree that a pension crisis looms.
  • U.S. Congress (57 percent), board members (50 percent), Chief Executive Officers (43 percent), regulators (36 percent) and plan fiduciaries (36 percent) are identified as responsible for the pension crisis. Write-in answers point blame to lobbyists, Wall Street executives and those "who pushed the 401k lie."
  • When asked who can fix things, respondents express faith in U.S. Congress (36 percent), plan fiduciaries (36 percent), regulators (36 percent), governors and other state officials (29 percent), Chief Executive Officers (29 percent) and board members (21 percent). Write-in answers include a preference for a national solution, new regulation, ethical people and the securities industry to step up to the plate. 
  • Nearly 70 percent of respondents fear a Social Security crisis. One respondent suggests the removal of the Social Security cap so that FICA contributions increase as taxable income goes up.
  • Eight out of ten respondents agree that "most people are ill-equipped to invest their own money for retirement planning purposes."
  • Only 14 percent of respondents support "generous pension packages" for corporate and government leaders during hard economic times. One person questions the use of the word "generous," adding that "decent pensions for time served" make sense. Another person writes that executives often get paid for failure. Yet another survey-taker said that lumping together corporate and government executives is not a good idea.

My first reaction is one of puzzlement. If certain decision-maker categories are identified as pension "culprits" and then subsequently classified by survey-takers as those likely to solve problems, what is preventing action now and why aren't people upset about supposed inaction? 

In a related survey conducted by KPMG, analysts document a loss of purchasing power for many pensioners and a painful hit to the bottom line for UK sponsors. "The lost decade for pensions? " cites "growing life expectancies, disappointing equity returns and higher demands for cash" as some of the reasons that have led to almost a doubling of British defined benefit plans being closed or frozen when comparing 2000 to 2008. Authors of the study conclude that regulations can "help to ensure adequate future private sector benefit provision." While other studies suggest a similar panacea, I only invite readers to ponder whether excess regulation got us into this mess in the first place. Think perverse incentives, subsidized costs and compliance mandates that do not map back to economic reality.

Retirement plans, properly structured and managed, offer a lifeline to employees around the world. In contrast, poor governance could pit Jack against the giant but with no hope of a fairy tale ending.

Once again, let us know what you think. Click here to take this six question survey.

Pension Crisis: Fact or Fiction?

Investment Governance, Inc. wants to hear what you think about the current state of retirement readiness. Click here to answer a short survey of six questions. The survey is identical to one we ran a few years ago with one exception. This time, we added a question about whether corporate and government leaders should receive generous pension packages during hard economic times.

I will post results to this blog in a few weeks.

To refresh your memory, the results of the original survey are shown below.

  • Sixty-two (62) percent of respondents said there is a pension crisis looming.
  • When asked who was responsible for the crisis, board members (32%), chief executive officers (30%), governors and other state officials (27%), pension consultants (24%), plan fiduciaries (38%), regulators (33%) and U.S. Congress (41%) took the blame.
  • When asked who can fix things, 54% of respondents listed the U.S. Congress first, followed by plan fiduciaries (34%), regulators (29%), board members (28%), chief executive officers (25%) and governors and other state officials (25%).
  • A whopping seventy-five (75) percent of respondents acknowledged a Social Security crisis.
  • Fifty (50) percent of survey-takers strongly agreed that most people are ill-equipped to invest their own money for retirement planning purposes with thirty-two (32) percent moderately agreeing that people are literate with respect to retirement readiness.

Investment Ethics, Balloon Boy and Sizzle

A colleague called me the other day, after attending a recent Connecticut event that addressed "too big to fail" concerns on the part of state regulators. In response to her comment about the large crowd size, I queried her about whether a forum on investment ethics would likely be a similar draw. Somewhat surprising to me she said "no" with nary a hesitation in her voice. Teasing her for more information, she simply declared that the topic of ethics is boring. Is she right?

Is ethics too dry to appeal, even to those tasked with compliance and investment best practices? Should we even compare ethics hounds to those of us who watched the silver spaceship-like balloon, floating above the Colorado countryside a few weeks ago, wondering if Balloon Boy was safely tucked inside? (Go on, admit it. You took at least one peek to hear whether a 6-year old really can fly, unsupervised, 8,000 feet above ground.)

Let's assume for a moment that celebrity and quirky news stories trump discussions about ethics and governance. Should we care? 

I've long maintained that carrying out one's professional duties with integrity does indeed impose a need to pay attention to what is right. Yet recognizing that one should be "ethical" is a necessary but insufficient condition. One can acknowledge the need to act properly yet do nothing about it, exposing ultimate beneficiaries to potential ruin. Then there are those who embrace the mantra but are blind to the gap between "investment best practices" and compliance. One can adhere to the letter of the law and yet fail miserably in terms of improving internal controls (and much more) so that investment risk is mitigated.

Since compensation levels are in the headlines of late, I'd like to repost an article that my colleague Wayne Miller and I wrote several years ago. Though written for retirement plan executives, the issues we discuss in "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?" ring true today and will apply tomorrow. The primary assertion is that individuals behave according to incentives in place. The rewards must be clearly positive and attainable for anyone who rightly walks the extra mile on behalf of beneficiaries (mutual fund investors, retirement plan participants, etc).

What will entice my friend to race to a meeting to learn more ethical behavior, along with hundreds of others? Free wine and cheese or a true belief that comprehensive risk management is simply the only course of action for high-integrity stewards of other people's monies? Alas, she may not soon have a choice. Regulators and politicians will not be handed the next Madoff scandal on their watch.

According to her October 27, 2009 speech to attendees of the SIFMA Annual Conference, the SEC Chairman Mary Schapiro has created a new Division of Risk, Strategy and Financial Innovation and has its sights set on "new products - particularly those related to retirement investing." She emphasizes the need for "simple, clear disclosure" in lieu of "complex fee arrangements or product descriptions...Already on the radar screen are target date funds and securitized life settlements."  Click to read "The Road to Investor Confidence."

Is the SEC focus a faux reward? Comply and stay out of trouble (a carrot of sorts) but not necessarily map actions to best practices (hence one runs into a proverbial brick wall with attendant pain). How will good players be differentiated from bad but lucky investment professionals? Alas, this is a topic for another day.


History Repeating Itself or a New Start in 2009?

Philosopher George Santayana once said that "Those who cannot remember the past are condemned to repeat it." If Nikolai Kondratiev were still alive, he might agree. An advocate of  long duration boom-bust periods, this Russian economist is credited for giving life to what is oft-described as a Kondratieff wave. His study of  American, English and French prices and interest rates from the 18th century led him to believe that an economic cycle is likely to repeat every 60 years, occuring as four distinct phases (inflationary growth, recessionary stagflation, mild growth and then depression). Click here and here for an interesting overview of Kondratieff's theories, applied to modern times.

As we launch into a new year, full of hope for a respite from what can only be described as a roller-coaster horrible, one wonders what lessons will be learned and acted upon. The Pension Governance team, not surprisingly, votes for a renewed (or for some organizations, a de novo) emphasis on enterprise risk management wherein plan sponsors hunker down to identify and properly measure the alphabet soup of nasties that can roil either a defined contribution or defined benefit plan. As I wrote several years ago, "Risk comes in many forms and ignoring it, while emphasizing returns, makes little sense." Click to read "Pension Risk Management: Necessary and Desirable" (Journal of Compensation Benefits, March/April 2006),

Importantly, a holistic risk management process must go well beyond benchmarking against point-in-time numbers alone. A June 9, 2008 article proves this point with respect to traditional pension plans. In "Surplus hits $111 billion," Pensions & Investments writer Rob Kozlowski chronicles a two-year rise in excess funding for the top 100 U.S. corporate schemes. Just six months later, Barrons reporter Dimitra Defotis cites a Credit Suisse report that has S&P 500 companies facing a "pension deficit of at least $200 billion," the "largest shortfall since 2002, when pension liabilities exceeded assets by a record-setting $218 billion in the aftermath of the dot-com bust." See "The Math Doesn't Add Up" (December 8, 2008). Owners of defined contribution plans are taking it on the chin as well. As USA Today reporter Christine Dugas lays out, more companies are dropping the 401(k) match at the same that plan participants have been hit with large negative returns. See "401(k) losses: Older investors' retirement funds hit hard" (October 31, 2008).

Questions abound, though not directed to any particular plan or organization. What could have been done differently to minimize the ill-effects of a systemic meltdown? What was the role of intermediaries in terms of advice-giving? Was there proper diversification? Was too much latitude given to asset managers? Was scant attention paid to risks relating to internal controls, valuation and restrictions on being able to liquidate particular holdings? Were investments in some cases not truly suitable for beneficiaries?

If New Year's Day marks an opportunity for a fresh look at life, why not make 2009 the year of the comprehensive pension risk manager?

Revisiting Whether a Pension Crisis Exists

On March 23, 2006, this blog asked "Is There a Pension Crisis?" wherein readers were requested to take a five question survey. On April 22, 2006, we reported the survey results in a post entitled "Retirement Blame Game Survey". Plan fiduciaries came up high on the list according to 38% of respondents. In the current sub-prime crisis environment, when many clamor for more regulation, it is interesting to note that U.S. Congress (41%), regulators (33%) and governors and state officials (31%) were seen as "culpable" for problems with the retirement system a few years ago. Perhaps not surprising, 54% of respondents in 2006 ranked the U.S. Congress highest when asked about who can fix things. Plan fiduciaries (regulators) were cited by 34% (29%) of survey-takers as empowered to make changes. A whopping 75% of questionnaire participants agreed that a Social Security crisis is upon us.

We'd love to get your feedback now, more than two years after we launched the original "pension crisis" survey. Click here to answer five short questions. Your responses will be kept private.

In the meantime, we asked a few folks what they think.

  • Mr. Steven Fowler writes: "The public pensions are the hardest hit. The plans base their decisions on outdated and unrealistic life expectancy assumptions. Additionally, all pension plans are going to come under significant pressure as the baby boomer generation enters the retirement phase. This will create a significant draw on pension monies while also reducing cash inflows at a time when it could take several years to recoup losses related to the recent market downturn."
  • Mr. Larry Steinberg writes: "Pensions, public and private, were in trouble before the stock market dropped 50% in value. Now it will only get worse, especially for people who are counting exclusively on those monies and have not saved elsewhere. Union pensions could actually be the worst off because they are not held to the same rules as private pensions." (Editor's Note: Taft-Hartley Act plans are considered ERISA (Employee Retirement Income Security Act) plans. I have asked Mr. Steinberg for clarification.
  • Mr. Earl Butler writes: "The short answer is Yes, especially when you consider public pension plans. Most plans for firemen and police officers are overly generous and not fiscally grounded in reality. Given the second wave of the financial crisis (i.e. the tax revenue shortfall at the municipality level), it is foreseeable that either these plans will need to be revised or injected with capital as part of a stimulus package."
  • Mr. Sanjay Bhasin writes: "The pension industry is currently hit with a double whammy. Increased longevity of pensioners is a fact of life. This has been reinforced by the recent issuance of the VBT2008 by the Society of Actuaries. However, not every pension scheme recognizes this, thereby leaving a 'hole' in its liabilities. Unless duration-matched, the assets of pension schemes are vulnerable to sharp swings in market conditions. If equities are deemed the best long-term inflation hedge and source of long-term economic growth, plan sponsors will have to live with the short-term volatility that comes with a heavy concentration in stocks. Higher liabilities and plunging asset values do not make for a happy future for the pension industry. Available data suggests that the situation is similar for most of the developed world. Consider that in the UK, nearly 8,000 funds being monitored have swung from a 10% surplus to a 10% deficit in the past year. Clearly, plan sponsors - whether private or public - have a problem on their hand, especially as relates to defined benefit schemes. Looking at things a different way begs the question. How realistic is it to require short-term valuations of very, very long-term assets and liabilities? The average duration of pension liabilities (active/retired/deferred) is clearly 20+ years. While the problem certainly cannot be ignored, does it make sense to lose sleep over monthly or quarterly fluctuations due to changing market conditions? There are sophisticated solutions (none of them inexpensive) to tackle the pension problem. However, a simple (rather simplistic) approach is to recognize longevity more accurately, and to the extent possible, duration-match assets. Equity investors are, by definition, exposed to market cycles and they should hope that the current downturn will be followed by an appropriate upturn. I will worry about myself when I am closer to receiving my pension. In the meanwhile, I do worry about my friends who are reaching pensionable age. More than the underlying assets of their pension schemes, the issue is whether the plan sponsor will survive the present crisis."

Well said gentlemen. Thank you for your erudite observations. For anyone else who wants to comment on the state of the pension industry, email We want to hear from you!

Don't forget to take our short (only five questions) pension crisis survey. Click here to begin.

Sturm und Drang in Europe Over Pension Cuts

According to "Europe Tries to Handle Political Fallout of Pension Cuts" by Carter Dougherty (New York Times, August 5, 2008), we learn that the "third rail of politics" is clearly a global pain point for legislators. Changes that include raising the retirement age (such as in Italy and Germany) or extending the service requirements for government workers (such as in France) could be figuratively lethal for those in power. Dougherty warns that European workers have cause to worry, stating that "Forty percent of Belgians over 75" will "live in poverty by 2016" according to official statistics.

The article describes the creation of the Pensioner Party by a disgruntled German retiree, now focused on electing candidates who will advocate for a "more generous pension system." Google lists a URL for "The Pensioners Party," a UK registered political party with stated objectives that include the removal of means testing, payment of higher benefits and various other assorted freebies. Milton Friedman is calling out to us - "There is no free lunch." National Public Radio reports that an Israeli Pensioners Party is "shaking up the balance of power after winning seven seats in the country's parliament." See "In Israel, Pensioners Party Surprises With Gains" by Eric Westervelt, April 2, 2006.

Unfortunately, the "graying" of global populations and financial reality make it extremely difficult to do anything but acknowledge that change is imminent. The recission of hard-fought reform to avoid public outcry and political fallout is only going to exacerbate an already serious situation. Numerous countries, especially those with entrenched state plans, are being squeezed due to dramatic demographic shifts and benefit largess. In response, countries such as Sweden and Poland are urging individuals to participate in employee-directed plans. Germany has offered a tax incentive for private savers. One would hope that retirees, counting on promises made and possibly facing limited work opportunities, will have "enough" to survive. 

The political ramifications, in Europe, the United States and elsewhere, are huge. Do not be surprised if older voters are soon fighting at the ballot box with younger workers who feel the crush of large retirement plan IOUs. The sad truth is that real people are going to get hurt. That is why the crisis must be recognized and managed, sooner than later. Time is a luxury that few countries can afford.

Editor's Note: The American Association of Retired Persons (AARP) presents detailed information about retirement plan issues in a variety of countries. Click to access any or all of these AARP research publications (free to the public).

Is There a Link Between Weight and Benefits?

A few weeks ago, en route to speak at a valuation conference about hedge fund issues, I sat next to a health-conscious surgeon. For nearly an hour, he spoke passionately about spiraling hospital and pharmaceutical costs, due in large part to what he described as an obesity epidemic. He offered several compelling examples of procedures that could have been done at a much lower cost, had patients been smaller in girth. Though I consider myself a healthy person (low-fat diet, regular exercise), I do admit to a few pounds of excess baggage. You can therefore imagine my discomfort as I munched on my Power Bar, wondering - Is he addressing non-skinny people like me or outright weight-challenged children and adults?

It was no surprise then that this Sunday's New York Times addressed this problem, said to be costing employers big-time. In her piece, reporter Kelley Holland links to an "aha moment" map, courtesy of the Centers for Disease Control and Prevention. Based on 2006 data, all but four of fifty states clearly struggle with obesity, with at least 20 percent of adults having a Body Mass Index ("BMI") in excess of 30. (According to the Department of Health and Human Services, BMI is a gauge of body fat. BMI numbers above 25 place an individual in the overweight category. Use the online calculator to get a rough estimate of your BMI.) Holland continues to grab attention with some sobering statistics.

  • More than 25 cents of every dollar spent on medical services is due to excess weight complications (based on research conducted by Emory University Professor Kenneth Thorpe).
  • The corporate tab for too many muffins is $45 billion per year (according to a Conference Board report). See Medical News Today, April 10, 2008.
  • Obesity links to chronic health problems more than smoking or excess drinking (based on Rand Corporation research by economist Roland Sturm).

 "Waistlines Expand Into a Workplace Issue" is a scary read. Citing examples of employers that offer incentives to visit the gym and otherwise slim down, Holland writes that more needs to be done, despite the fact that it is a "sensitive" issue. While I'm the last to make a value judgement about weight, some disturbing thoughts come to mind.

  • How are longevity patterns (and the related cost of offering healthcare benefits and a traditional pension) impacted when plan participants are officially deemed overweight?
  • Do employers experience lower costs if their pension plan covers mostly unhealthy participants?
  • For employers that offer both health insurance and a defined benefit plan, do they deem an "optimal" mix of healthy versus not so healthy plan participants? (This assumes that healthier individuals who live longer push pension costs up but keep a lid on healthcare benefit expenses.)
  • Should employers figuratively serve "in loco parentis" or does this expose them to allegations of discrimination?

Ban the coffee cake. Carrots anyone? 

Aussie Seniors Unrobe to Protest Pension Problems

Derobing is certainly a novel way to draw attention to "anemic" benefits. According to "Seniors strip in pension protest" by Stacey Zenin (, May 16, 2008), several hundred retirees took off a few pieces of clothes to campaign for a "fair go for pensioners." Believing that the current federal budget does too little to add to post-employment financial security, seniors clamor for "between $70 and $100 extra per week in their pensions." Not unique to Down Under, the problem of financing retirement benefits is fast reaching crisis proportion for numerous governments. Balancing a budget is tough going without considering changes in tax policies and benefit levels.

For an interesting take on the Australian pension system, check out "Risk-Based Supervision of Pension Funds in Australia" by Graeme Thompson, February 1, 2008, World Bank Policy Research Working Paper No. 4539.

Editor's Notes:

1. This blogger had the pleasure of working with Mr. Graeme Thompson on a Chilean pension project, done in conjunction with Dr. Roberto Rochas of the World Bank.

2. Check out the pension risk management section of the Social Science Research Network.

Plan Sponsors Win - Beneficiaries Over 65 Lose

In today's edition, New York Times reporter Robert Pear describes a recent action by the Equal Employment Opportunity Commission ("EEOC") that gives employers free rein to cut back benefits for persons 65 and older. (See "Many Retirees May Lose Benefits From Employers.") The rationale seems to be that, once eligible for Medicare, senior workers should transition fully or partially out of private benefit programs because they are otherwise covered. Quoting EEOC Chair, Naomi C. Earp, the goal is to encourage plan sponsors to continue voluntarily providing and maintaining health benefits. Premiums deemed "too high" and the fact that people are living so much longer than ever before is creating havoc with corporate bottom lines. As a result, "many employers refuse to provide retiree health benefits or even to negotiate the issue." In some cases, if they are unable to contain costs for benefits offered to older workers, companies may decide to cut back altogether. This means that younger workers would be exposed - no employer provided coverage, no Medicare.

According to the December 26,2007 Federal Register, the new policy protects plan sponsors from legal threats of age discrimination in the event that they create a two-class benefits program. The "Appendix to Sec. 1625.32--Questions and Answers Regarding Coordination of Retiree Health Benefits With Medicare and State Health Benefits" provides additional information. The upshot is that employers now enjoy flexibility to (a) provide retiree healthcare benefits “only to those retirees who are not yet eligible for Medicare" (b) modify, reduce or eliminate benefits upon an employee's 65th birthday and (c) decrease or eliminate health benefits for the spouse or children of a retiree of a certain age.  

How many companies rush to the door remains to be seen. As employers struggle to attract and retain good workers, including those with a bit of gray, providing or reinstating diminished benefits may come to pass. Only time will tell.

Fidelity Abandons its Traditional Plan

According to its May 12, 2006 press release, Fidelity Investments expands its offering to deliver "defined benefit plan sponsors increased investment flexibility and greater access to and control of plan data to help them identify and mitigate financial and fiduciary risks."

In today's Investment News, reporter Kathie O'Donnell writes that Fidelity Investments will replace its traditional pension plan for over 30,000 participants and instead offer them a "retiree health reimbursement plan and a beefed up profit-sharing plan." O'Donnell adds that Fidelity's in-house studies suggest the need to address the health care gap, the company match will increase to 7% from 5% and profit-sharing contributions will continue.

For some reason, today's headline stood out, causing me to wonder. Might it make sense to ask pension advisors, consultants and money managers what plan(s) they offer to their employees and why?

Retirement Blame Game Survey

As retirement plan losses mount, the inevitable finger pointing ensues. In a recent survey of visitors to this blog, an overwhelming 96 percent of people agree that a pension crisis looms large. What's interesting is that multiple parties are getting the blame, with the lion's share going to U.S. Congress, plan fiduciaries, pension consultants, governors, regulators and board members.

Here are the results so far.

"Assuming you think there is a pension crisis, who do you think is responsible?" (Respondents were allowed to pick more than one answer.)

Attorneys: 10 percent
Auditors: 14 percent
Board Members: 31 percent
Chief Executive Officers: 24 percent
Employees: 17 percent
Governors and Other State Officials: 31 percent
Money Managers: 10 percent
Pension Consultants: 34 percent
Plan Fiduciaries: 45 percent
Regulators: 38 percent
Retirees: 7 percent
Shareholders: 3 percent
Taxpayers: 7 percent
U.S. Congress: 41 percent
Honorable Mention: IRS, Unions, Actuaries

When asked who can fix things, U.S. Congress, board members, plan fiduciaries and regulators took the lead. Interestingly, while pension consultants and state legislators are cited as part of the problem, they are not given much credit for being part of the solution. Only 21 (18) percent of respondents pick pension consultants (state politicians) as likely rescuers. Perhaps this stems from a feeling that the "pension crisis" must be addressed at the top in terms of tax, financial and accounting incentives and constraints.

Regarding Social Security, 76 percent worry about a current crisis.

An eye-popping 96 percent of respondents agree that "most people are ill-equipped to invest their own money for retirement planning purposes". The sorry state of financial literacy has been discussed in several posts and countless articles elsewhere by investment pundits. Regulators are clearly concerned too. On April 11, IMF Director Hausler emphasized the exposure of retail investors to a wide array of complex risks, adding that a "low level of financial literacy, combined with extensive risk taking, is politically an explosive brew."

Expert Panel Addresses Financial Impact of Pension Crisis

Valuation and risk professional Dr. Susan M. Mangiero, CFA, AVA, FRM will moderate a panel of esteemed retirement plan experts at the forthcoming 42nd annual meeting of the Eastern Finance Association at the Sheraton Society Hill in Philadelphia on April 20 from 10:15 a.m. to noon. (The hotel is located at 1 Dock Street in Philadelphia.)

Months away from sweeping Congressional reform and accounting standards that will dramatically impact the financial health of Corporate America, a diverse and seasoned panel of experts will talk about plan termination, 401K plan design, pension governance, fiduciary compliance, ERISA litigation trends, liability-driven investing and pension risk management with respect to shareholder value and employee productivity and morale. With over $10 trillion and 100 million plan participants at risk, conference producer Dr. John Finnerty describes this presentation as "an urgent call to our 850 financial members who are helping finance leaders, at all levels, grapple with the real challenges that post-retirement benefits present". Moderator Dr. Mangiero concurs. "CEOs and CFOs alike are quickly realizing how vulnerable they are to pension problems that can force rating downgrades, invite litigation and higher regulatory compliance costs, increase the cost of capital and otherwise impede corporate growth. For more than a few companies, pensions have become a veritable albatross."

Panelists include Mr. I. Lee Falk, Senior Counsel (Morgan, Lewis & Bockius LLP), Mr. Wayne H. Miller, CEO (Denali Fiduciary Management), Mr. James V. Morris, Senior Vice President (SEI Global Institutional Group) and Mr. Norman Jackson, Deputy Regional Director (United States Department of Labor - Employee Benefits Security Administration's Philadelphia Regional Office).

The general public is invited. There is a nominal fee of $50, payable at the door. The Eastern Finance Association is a non-profit organization. Its members include college and university professors, officers of financial institutions and organizations, and others interested in finance and the objectives of the EFA. The Association sponsors The Financial Review, a journal that publishes original empirical, theoretical, and methodological research providing new insights into issues of importance in all areas of financial economics.