Investment Return Expectations and Wishful Thinking

When it comes to strategy games, count me in. Bridge and Scrabble are two of my favorites except when it looks like I have little chance for victory. It's one thing to lose a hand or two but feel confident in a possible win. It's altogether depressing to know that recovery is unlikely. This happened a few days ago when my husband added an E, U, A and L to create a cluster of words that scored him sixty-seven points. Ouch. Even with lots of high point letters, I knew that besting his bonanza move was improbable. Each time we play, I begin on an optimistic note and hope for a favorable outcome until that moment when I know it's time to recast my calculations.

It's good to wish upon a star yet just as important to distinguish fantasy from fiction. That's why I was surprised to learn the results of a recent study of 400 institutional investors about their performance predictions. Carried out by State Street Global Advisors ("SSGA"), in conjunction with the research arm of the Financial Times, main takeaways from the "Building Bridges" study include the following:

  • Traditional asset allocation models may be unable to generate a long-term average rate of return of eleven percent, certainly without forcing buyers to take on more risk.
  • Forty-one percent of survey-takers expressed a preference for "traditional" classifications of asset exposures versus factor or objective-driven identifiers.
  • Eleven percent of those in search of closing "performance gaps" rank smart beta strategies as most important and 38 percent of institutional investors will employ this approach alongside other activities. "Significantly, three-quarters of those respondents who have introduced smart beta approaches found moderate to significant improvement in portfolio performance."
  • Enlightened decision-makers are finding it hard to get board approval of "better ways to meet long-term performance goals" and peer groups are slow to follow suit.
  • Eighty-four percent of pension funds, sovereign wealth funds and other asset owners believe that underperformance is likely to continue for one year.

As Market Watch journalist Chuck Jaffe somewhat indelicately points out in "An overlooked investment risk: wishful thinking" (May 18, 2016), long-term investors are daydreaming if they believe they can regularly generate eleven percent per annum. He quotes Lori Heinel, chief portfolio strategist at SSGA, as acknowledging the difficulty of achieving this number, given "a really challenging growth outlook, inflation environment, and a really challenging investment return environment." Notably, it was only a few weeks ago when the special mediator for the U.S. Treasury Department sent a letter to Central States Pension Fund trustees, denying a rescue plan in part because its 7.5 percent annual investment return assumptions were not viewed as "reasonable."

As I described in an earlier blog post entitled "A Pension Rock and a Hard Place," public pension funds, union leaders, taxpayer groups and policy-makers are navigating choppy asset-liability management waters. They are not alone. Corporate plans, endowments, foundations and other types of institutional investors are likewise challenged with getting to their destination and not crashing on the rocks. My unrealistic expectations might lose me a game. For long-term investors, there is serious money at stake and model inputs are being scrutinized accordingly.

A Pension Rock and a Hard Place

Not surprisingly, the conversations about pension reform are getting louder and taking place more often. Calls for further transparency, political posturing and headlines regarding the link between municipal debt service and questions about the contractual nature of pension IOUs are three of the many factors that are being hotly debated, with no end in sight. Interested parties are invited to read "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz, CPA. Published by the American Bankruptcy Institute, the authors bring attention to the fact that courts are making decisions about critical issues such as whether creditors, in distress, can move ahead of public pension plan participants. Click here to read more about the article and the connection between retirement plan promises and municipal bond credit risk.

Others are approaching the topic of public and corporate pension plan obligations from the perspective of younger workers being asked to subsidize seniors. In "Why We Need to Change the Conversation about Pension Reform" (Financial Analysts Journal, 2014), Keith Ambachtsheer writes that "Pension plan sustainability requires intergenerational fairness." He adds that suggestions such as lengthening the time over which an unfunded liability can be amortized or assuming more investment risk "effectively pass the problem on to the next generation once again."

Legislators are slowing starting to act, in large part because they cannot afford not to do so. According to Wall Street Journal reporter Josh Dawsey, New Jersey Governor Chris Christie has spent his summer with constituents, holding town hall meetings to explain his decisions about pension plan funding. See "Christie Plays Pension Issue Beyond N.J." (August 9-10, 2014). On August 1, 2014, he signed Executive Order 161 to facilitate the creation of a special group that is tasked with making recommendations to his office about tackling "these ever growing entitlement costs."

New Jersey is not alone. Prairie State politicos are attempting to forge reform. In "4 reasons you should care about pension reform in Illinois" (July 25, 2014, Chicago Sun Times reporter Sydney Lawson explains that the $175.7 billion owed to participants and bond investors will cost every taxpayer about $43,000 if paid today. According to its website, the Better Government Association estimates that replenishing numerous police and fire retirement plans in Cook County will "require tax hikes, service cuts or both."

The Big Apple retirement crisis  is no less massive. New York Times journalists David W. Chen and Mary Williams Walsh write that "the city's pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year." A smaller asset base and decision-making that occurs across five separately managed funds are described as trouble spots for Mayer Bill de Blasio. Noteworthy is the mention of an investigation by Benjamin M. Lawsky, head of the Department of Financial Services, that seeks to understand how service providers were selected to work with New York City pension plans and the level of compensation they receive. See "New York City Pension System Is Strained by Costs and Politics" (August 3, 2014).

Curious about the extent of this New York City and New York State focused investigation, I asked one of my researchers to file a Freedom of Information Act request in order to obtain details. We are awaiting the receipt of meaningful results. So far, we are being told that information is not available to send. What is known so far, based on an October 8, 2013 letter from Superintendent Lawsky to Comptroller of the State of New York, Thomas P. DiNapoli, is that questions will or are being asked about retirement plan enterprise risk management and "[c]ontrols to prevent conflicts of interest, as well as the use of consultants, advisory councils and other similar structures."

Pandering for votes by promising lots of goodies may not be a successful recipe for reforming pensions that need help. Moreover, judges are in the driver's seat once a dispute about contractual status is litigated. In a recent opinion, a federal court of appeals ruling about lowering cost of living adjustments overturned an earlier decision that such an action was unconstitutional. See "Baltimore wins round in battle over police, firefighters pension reform" (The Daily Record, August 6, 2014). Click to download the August 6, 2014 opinion in Cherry v. Mayor and City Council of Baltimore, No. 13-1007, 4th U.S. Circuit Court of Appeals.

Like Homer's Odysseus who was caught between Scylla and Charybdis, policy-makers, union leaders and heads of taxpayer groups are navigating some very rough waters indeed. We have not seen the end of these heated debates about what to do with underfunded municipal pension plans. Trying to align interests of seemingly disparate groups is only the beginning.

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.

Gloomy Jobs Outlook and Impact on Retirement Planning

Job hunters and those already employed may need super powers to ready themselves for retirement. A big part of planning is knowing what you are likely to earn from work. For so many without jobs and deep in debt, looking ahead is tough. People with jobs are affected too. Even fuzzy mathematicians have to acknowledge that taxpayers will be stretched further as the number of non-contributors goes up.

To say that this issue has touched a nerve is a gross understatement.

ERISA attorney Stephen Rosenberg and blogger extraordinaire at ruminates about labor force participation all the time and commented accordingly. "I have always thought that a reduction of force ("RIF") of people in their 50s, perhaps via early retirement programs (combined with subtle bias, structural and otherwise, against older workers), on the one end, and the demands for more education before starting careers/difficulty getting first jobs on the other end, were creating a much smaller and more demographically circumscribed labor pool. I am reminded all the time that the most important thing in the economy is job creation – real jobs, like when a new business makes it. It creates such a ripple effect for everyone else, that nothing equals it." ERS Group labor economist, Dr. Dubravka Tosic, asserts that "A critical lack of supply of qualified labor in certain occupations is really startling. Consider the shortage of truck drivers and truck mechanics as two examples. There is a nursing shortage as well although the imbalance may be somewhat corrected as qualified persons are allowed to work in the United States on special visas from countries such as the Philippines. Returning veterans with needed skills could be another way to help companies in need of qualified workers." She points to a recent article entitled "Seventy Four Percent of Construction Firms Report Having Trouble Finding Qualified Workers" (September 4, 2013) as one of many references.

Last week, the U.S. Department of Labor announced the addition of 169,000 jobs in August 2013 with a steady unemployment rate just above seven percent. Netted against its downward adjustments for June and July 2013 number, the true increase is pegged at 95,000 jobs. See "U.S. Adds 169,000 Jobs in August, But Economic Outlook Remains Gloomy" by Christopher Matthews, Time, September 6, 2013. Ask most people what they think about the future and expect to get a reply that reflects cautious optimism at best. Withdrawals from 401(k) plans have exacerbated an already difficult situation for the disillusioned, underemployed and out of work professionals.

This blog author will return to the issue of retirement planning as it is important to all of us, individually and collectively, except perhaps to the top one percent of wealth owners. According to "Top 1% take biggest income slice on record" by Matt Krantz (USA Today, September 10, 2013), individuals at the head of the class account for "19.3% of total household income in 2012, which is their biggest slice of total income in more than 100 years."

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.

Economic Indicators to Include Focus on Pensions

In what most people would call a significant announcement, the U.S. Bureau of Economic Analysis ("BEA") will begin measuring economic growth this summer by taking pension finance into account. According to its March 2013 announcement, BEA will record defined benefit plan transactions on an accrual accounting basis. This entity, part of the U.S. Department of Commerce, will now include a pension plan subsector in the national income and product accounts ("NIPAs"). As much as possible, the BEA will "provide estimates of the current receipts, current expenditures, and cash flow for the subsector." The intended changes contrast with the current method of including information about disbursements and earnings of pension plans as participants' personal items and using a cash basis for reporting.

The goal of enhancing transparency about employer-provided defined benefit retirement plans is laudable. However, in reading the fine print, one wonders if the opposite will occur and users of post-implementation data will be more confused. For one thing, the BEA states that it will adopt an accumulated benefit obligation ("ABO") for "both privately sponsored and state and local government sponsored plans" and use a projected benefit obligation ("PBO") for federal government plans. This means that you will never be able to compare all defined benefit plans with a single set of rules. Second, the BEA describes a discount rate assumption that "will be based on the AAA corporate bond rate published by the Federal Reserve Board." Since debt issued by the U.S. is no longer rated AAA and recent regulations allow for temporary funding relief for corporate pension plans, how will BEA numbers compare and contrast with financial accounting numbers over time? Third, since certain data is not available prior to 2000, the BEA will extrapolate to generate "normal costs" for past years. Will their method of extrapolation allow for an accurate "apples to apples" assessment of historical pension earnings and costs? In the plus column, applying the same discount rate for private pension plans versus state and local offerings will help to better assess the economic viability for each sector.

Should the Public Employee Pension Transparency Act move forward, disclosures will be based on the BEA approach. Understanding what BEA numbers do or do not show will therefore be a critical exercise for policy-makers, investors and participants.

For a detailed discussion of these intended changes on the part of the BEA, read "Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts: Changes in Definitions and Presentations," BEA, March 2013. Click to read about advantages of passing the Public Employee Pension Transparency Act. Click here to read criticisms of this proposed rule. On April 23, 2013, the U.S. Senate received a version of the Public Employee Pension Transparency Act in the form of S. 779. This proffered legislation cites a staggering $5.170 trillion in pension liabilities of the 50 states combined. It is no wonder that numerous individuals want a true tally of what is owed.

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.

$89 For An Umbrella and No Money To Retire

In between business meetings in Greenwich, Connecticut the other day, it started to rain heavily so this blogger walked a few blocks to an upscale department store (the closest in sight), in search of a reasonably priced umbrella. Since I have so many umbrellas already (but had forgotten to pack one), I figured I would spend a modest $15 or $20 to buy another umbrella to keep me dry. How much could an umbrella cost after all? To my surprise and shock, none of the umbrellas came in at less than $89 (plus tax of course). For some people, that's a tiny price for protection. Certainly this merchant was thriving with designer attire, shoes and jewelry finding its way into shoppers' bags.

However, the reality is that not everyone is going to shell out 89 big ones for an umbrella, no matter what the brand. For a large segment of the U.S. population, money is a scarce resource and confidence in a secure future is low. According to the results of a recent Wells Fargo/Gallup Investor study, optimism is down and pessimism is up. At the same time that 68% of respondents say they have "little to no" confidence in the stock market as a way to prepare for retirement, 80% of investors urge lawmakers to act now so that savings is encouraged.

Unfortunately, most of the initiatives that individuals cite as "must have" elements of a national retirement readiness program are in direct conflict with the political grab to raise taxes. Consider a few examples.

  • Sixty-nine percent of the survey respondents say it is "extremely" or "very important" that politicians encourage every company to offer a 401(k) plan to its employees. Since there is already talk in Washington, DC about stripping companies of the tax benefits associated with offering retirement plans, it is unlikely that employers will realize further tax advantages at the expense of big spenders having to lose tax "revenue."
  • Sixty-six percent cite the need for the government to figure out how Americans who participate in 401(k) plans can get "more quality investment advice." Anticipating increased regulations as relates to investment fiduciary duties, some financial advisors are becoming less generous with information for fear of being sued. As described in "401(k) Lawsuits, Investment Advisers and Fiduciary Breach" (November 18, 2012), breach of fiduciary duty is cited as the top complaint in FINRA arbitration matters.
  • Sixty-nine percent want the government to establish initiatives that will motivate individuals to participate in their employer's 401(k) retirement savings option, assuming that they work for a company that offers benefits. Yet here we are, talking about a fiscal cliff that could impact millions of people with incomes below the magical "rich" benchmark of $250,000.  For one thing, in the absence of inflation indexing, the Alternative Minimum Tax that was enacted decades ago will show up as a nasty spring 2013 surprise for countless tax-paying middle-class households. Then there is the issue of jobs not created because employers will be writing larger checks to the IRS instead as various tax rates go up.

The United States is not alone in having to tackle difficult problems. The list is long and includes (but is not limited to) insufficient aggregate savings, underfunded social programs that are not sustainable safety nets without reform, high unemployment, corporate jitters about parting with cash, uncertain tax and regulatory environment and conflicting interests that make it almost possible to come up with near-term solutions.

There is a way forward to expand economic growth but that will require political courage. Let's hold our policy-makers accountable in 2013.

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."

Work Opportunities and Retirement Realities

In its "2011 Retirement Confidence Survey," the Employee Benefit Research Institute found that few people are confident in their ability to retire at the traditional age of 65 or 66 years of age. The jitters make sense given that "A sizable percentage of workers report they have virtually no savings or investments." Funding woes related to Social Security and Medicare benefits add to an already gloomy scenario.

On the bright side, research suggests that work opportunities abound, notably in fields such as professional training, computer games, biotechnology, computer networking, nanotechnology and wireless. According to WIRED Magazine writer Adam Davidson, these opportunities can be collectively labeled "smart jobs" because they are "innovative and high tech," specialized, involving factories and machines and available to transform the middle class. Moreover, the geographic pockets of inspiration include cities such as Provo, Little Rock, Savannah, Wichita, Denver, Reno, Hartford, Rochester, Omaha and Des Moines.

Check out the "The Economic Rebound: It Isn't What You Think" by Adam Davidson, May 31, 2011 for an interesting analysis of the new employment paradigm, one that comes at a time of grave concern about what is next for millions of individuals. In conjunction with National Public Radio ("NPR")'s Planet Money, Mr. Davidson provides numerous examples about industrial and service technologies and processing enhancements that could make an extended work life prosperous for more than a few already at the top.

New Report on Endowments and the Shadow Banking System

In a new study by the Tellus Institute, wealthy college and university endowments are described as being over zealous with respect to investment risk-taking in recent years. Related losses during the financial crisis arguably account for school staff layoffs, major budget cuts and postponed construction projects. Local businesses have been hard hit too as part of the trickle-down argument against allocating to "large illiquid investments" by academic money pools, courtesy of successful graduates.

In its examination of a few of the U.S. ivory tower giants, authors had some harsh words for those who may have turned from protecting principal and "generating reliance income" to instead rely on "radical diversification" into venture capital, private equity, hedge funds and real assets. They question the existence of possible conflicts of interest when Wall Streeters serve as trustees. Compensation levels for professional endowment investing teams are likewise called into question. 

I plan to spend more time reviewing the 104-page publication as it includes many statistical tables that describe individual endowment holdings as well as the financial strength (or lack thereof) of certain schools. I am also curious to get this take on the endowment model. The flip side of course is that experienced financial professionals (whether trustees or part of a school's investment team) can add more value than someone with little or no asset management knowledge and, in a competitive world, they can command a handsome compensation package. Then there is the issue of being an alternatives wet blanket. I've long maintained that no investment is good or bad on its face and must absolutely consider a variety of facts and circumstances.

One wonders if there will be a renewed call for a study about whether to tax wealthy college endowments as proposed by the Massachusetts House a few years ago? See "Should huge college endowments pay tax?" (Christian Science Monitor, May 20, 2008).

This 104-page publication entitled "Educational Endowments And The Financial Crisis: Social Costs and Systemic Risks In The Shadow Banking System: A Study Of Six New England Schools" (May 27, 2010) is available for no charge.

Wives and the Checkbook


According to "New Economics of Marriage: The Rise of Wives" by Pew Research Center analysts Richard Fry and D'Vera Cohn (January 19, 2010), women are besting men "in education and earnings growth." Their statistics are noteworthy for countless reasons.

  • An observation that "marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women" suggests that those with degrees (and therefore statistically likely to earn more over their lifetime) are walking down the aisle.
  • For Americans between 30 to 44 years of age, there are more females than males with college degrees.
  • Three out of ten unmarried women with college degrees realize greater economic gains versus only fifteen percent of unmarried male who had gone on for higher education.
  • Household incomes grew for three out of ten married men with only a high school diploma. Less than two out of ten unmarried males with no college under their belts saw their checkbooks get bigger.
  • In both 1970 and 2007, 53 percent of survey-takers report that husbands and wives had the same level of education. In 2007, 28 percent of households declared that wives had more education versus 20% in 1970.
  • When the wife earns more money, only 21 percent of the respondent households claim the husband as the primary financial decision-maker versus 46% of situations where the Missus gets to choose. When the husband earns more, the number climbs to 35% in terms of final say on investments and purchases. In 36% of homes, the female better half decides.

In "She Works, They Are Happy" (New York Times, January 24, 2010), Tara Parker-Pope offers that divorce rates have dropped from 23 per 1,000 couples thirty years ago to 17 today, in part due to the ability for women to earn a living without help from a spouse. The result, she avers, is a change in how much time men spend on domestic chores and earning the bacon. While not yet an equal split, today's "to do list" at home is a far cry from the plaudits of Arlie Hochschild. In her still popular book, The Second Shift, this University of California - Berkeley sociology professor laments the imbalance between working men and women when it came to childcare and housework.

Demographic research about men, women and money always provokes thought and is great fodder for cocktail party chats. That's not all. The ramifications for individual financial planning, retirement plan policy-making and industry-wide sales and marketing efforts are immense. Women tend to live longer which necessitates a large enough piggy bank to pay bills over a longer period of time. Then there are all sorts of studies about how lifetime decisions are influenced by gender, age, education and income. Marketers cannot ignore the fact that their pitches must encompass the "who" and "how" of sales for IRA, mutual fund, annuities and insurance.

As the female earnings landscape is altered, office dynamics are not immune to change. In The Male Factor: The Unwritten Rules, Misperceptions, and Secret Beliefs of Men in the Workplace (December 2009), author Shaunti Feldhahn describes the results of a large-scale survey of men to better understand how they judge the opposite sex in a business environment. Not surprising perhaps, she finds that emotions and long-winded discussions (not getting to the point) are looked upon poorly by respondents. This begs the question - Will women change by being more like their male counterparts or will men learn to go with the flow and willingly accept communication differences? Will it depend on whether the boss wears a skirt or gets the coffee instead? 

As always, your opinions count. Email or add a comment to this post.

Editor's Notes:

Law Degree, PhD or Gamer?


When I was a doctoral student, there were invariable jokes about spending lots of time in school, only to find myself out on the street, competing with other PhDs to deliver pizza and otherwise under utilize what I had learned along the way.

Keep in mind that my situation is somewhat unique. I grew up in industry before I went back for my doctorate in finance with a minor in math. I had already worked over a dozen years on various trading desks. As a result, my objectives for higher education focused more on understanding the link between theory and practice. I was not disappointed. The experience has served me well in countless ways. I honed my abilities to model, test assumptions, ask questions and connect sometimes disparate dots. Time in the classroom at many levels (undergraduate, graduate, executive, professional) gave me a firsthand crack at realizing the importance of clear communication.

Unfortunately, not everyone is enjoying the graduate school experience. According to "Another Reason to Just Say No to a Ph.D." by Gabriela Montell (The Chronicle of Higher Education,January 14, 2010), real earnings for those with a professional or doctoral degree have dropped between 1999 and 2008. Taking a look at an article by Professor William Pannapacker who writes under the name of Thomas H. Benton ( "Graduate School in the Humanities: Just Don't Go, The Chronicle of Higher Education, January 2009), it strikes me that there is a great need to drill down into what the employment statistics truly mean.

In the legal world, associates share the glum factor with those in the humanities. New York Times reporter Alex Williams writes that changed expectations are the reality these days. With bad economic times unduly impacting industries such as financial services, real estate and high tech, legal professionals are hard pressed to keep driving the fee train forward. In "No Longer Their Golden Ticket," Williams cites a survey by the New York City bar association that found that one out of every two attorney respondents were "seeking counseling from its lawyer-outreach program list" for mental health reasons.

Returning to my December 28, 2009 post, entitled "'Up in the Air' - Stark Reality About the Employee - Employer Relationship?". work is a four-letter word. If we stay current with sought after skills, there is a good chance that angst may not ever come to visit. MSNBC reports that accountants and compliance officers are likely to win the jobs growth lottery. That includes financial examiners, with projected growth of "more than 40 percent from 2008 to 2018." Complexity, added accounting rules and new government mandates could contribute to a rosy future for some. Click to read "Next hot job? Keepings on financial firms" (December 11, 2009). Interestingly, salaries for game programmers are not too shabby either.

Of course, besides the ability to earn a living, some posit that doing what one loves and enjoying it at the same time is a worthy notion. As a European colleague once said to me, "Americans live to work. We work to live." Love what we do and get paid for it as well? La Dolce Vita indeed!

Happiness and the Zen of Work


Work is a four-letter word so can it ever be fun? According to the Conference Board, maybe not. In a recent survey, nearly half of respondents expressed dissatisfaction about doing work that was neither meaningful nor engaging. In contrast, six out of ten survey-takers declared themselves happy in 1987. Somewhat disturbing for would be recruiters is that angst and disappointment was not unique to any particular age group or income level though persons under 25 expressed "the highest level of dissatisfaction ever recorded by the survey for that age group."

As many on the hiring side know already, finding talent can be time-consuming and sap energy from even the most ardent employers. Now add the challenges of retaining productive workers while adding bright-eyed team members in a sad sack era of layoffs, mistrust and diminished budgets. Besides turnover costs, the bottom line could be impaired if few cheer lead for their company, collecting a pay check and already planning for the next gig.

Click to read more about "I Can't Get No...Job Satisfaction, That Is: America's Unhappy Workers," The Conference Board, January 5, 2010 press release entitled "U.S. Job Satisfaction at Lowest Level in two Decades. Click to read "Where America Stands: The State of America and Its Future," CBS News Poll, January 4, 2010 which echoes the observation that not everyone is optimistic about what the future holds.

In an attempt to end this blog post on an upbeat note, I invite interested readers to take a look at the work conducted by best selling author Marcus Buckingham. Rather than dwell on employees' weak points, he urges organizations to focus on strengths. According to his website, this author of "Go Put Your Strengths to Work" and "Now, Discover Your Strengths" urges that "individuals and teams playing to their strengths significantly outperform those who don't in almost every business metric."

The discussion that needs to take place now is one of responsibility.

  • Who should properly motivate and on what basis?
  • Do  happy, satisfied workers self-select by joining companies that provide "thank you" goodies such as great benefits, bonuses and opportunities to retool?
  • How much should and can employers do to make work fun or at least a place where people want to be for a reasonable period of time each day?
  • What can organizations do to overcome the survivor worries that accompany any recession?
  • How should benefit plans be modified, if ever, to marry together financial pressures with the part of the bottom line that is attributable to human capital?

We may never emulate Snow White's seven friends ("Hi Ho, Hi Ho, It's Off to Work We Go") but obviously something has to give if one out of every two workers is unlikely to stay put for more than a few months.


Can Hollywood Sell Tickets to Today's Economy Show?


Talk about a blast from the past. In watching "Barbarians at the Gate" over the weekend, I was struck by several things. First of all, this 1993 movie is a thoroughly entertaining hour and a half. Second, dollar amounts deemed to be whopping at the time seem downright puny today. What's that you say - $20 billion for a leveraged buyout. Peanuts my friend. Could we really call those days the good old times? Oh dear - what a legacy to leave our youngsters.

Turn the clock ahead and we have a veritable cornucopia of financial decision-makers with their own stories to tell. Imagine what a great casting agent and screenwriter could do with today's web of mystique and power.

Get the popcorn out.


Disappearing Trash Can and 401(k) Withdrawals


The other day, I visited our local Blockbuster store to rent a fun movie (anything for a pick me up with this gloomy market) and I noticed something missing. The trash can that I would ordinarily use in disposing of my weekend coffee cup was gone. In chatting with the video store manager, I was surprised to hear her say that the shopping center manager had deemed it a luxury and had it carted away. At $400 a month to empty, no more waste container. A true sign of the times no doubt but a bit disconcerting nonethless.

Retirement accounts have been likewise impacted by hard times. In "401(k)s Hit by Withdrawal Freezes" (May 5, 2009), Wall Street Journal writer Eleanor Laise describes what must be a horribly uncomfortable situation for plan participants. Unable to transfer their money out of funds invested in illiquid instruments such as real property or securities such as Lehman Brothers debt, individuals are confronted with lack of liquidity at the same time that they are watching the value of their holdings plumment. More than a few 401(k) plan fiduciaries are scratching their collective heads, wondering how otherwise "safe" alternatives could have been invested in "hard to value" securities or financial arrangements in the first place.

In defense of the asset managers, their claim is that unwinding positions to facilitate redemptionsfor some would place an undue burden on remaining investors. This is a familar theme. More than a few hedge fund managers last fall put the kabosh on redemptions by defined benefit plans, even when contractually permitted.

In "More People Tap Retirement Accounts" (May 7, 2009), Wall Street Journal reporter Arden Dale cites a recent Watson Wyatt study that chronicles an increase to 44% of the "number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans. Penalties for early withdrawal, taxes and the opportunity cost of not being able to earn interest on interest makes such requests expensive. However, if someone is laid off or asked to accept lower wages, it is no surprise that pull-outs are occurring now on a regular basis. Advisors suggest taking out a loan against defined contribution holdings if possible. 

Let's hope that financial woes are soon contained and that individual retirees are not asked to continue subsidizing decisions by others, over which plan participants had no control. The inconvenience of a disappearing trash can is one thing. Disappearing retirement accounts is a far more serious situation.

Honest Work is Good Work

Photo Source: Oakland Public Library

I put myself through college and graduate school. It was a tough road, strewn with bumps, potholes and lots of worry about what the future would hold. If someone can advance his or her career without the stress and uncertainty of bootstrapping, I say "go for it." Who needs the aggravation? That said, and in the spirit of searching for the silver lining in every situation, I like to think of myself as a survivor of sorts. Where others see failure, I see opportunity. Don't get me wrong. I've had a few pity parties but I try keep them as short as possible. Acknowledging that many of us are graduates of the School of Hard Knocks, where do you go with "woe is me?"

Tonight's blog inspiration (not necessarily tied to pension decision-makers alone) is a CNBC television show entitled "Finding a Job Now: What It Takes In This Economy." During this hour-long program, employment experts and commentators offered helpful tidbits for downsized executives including, but not limited to, saying yes to low-paying work, even if it entails underemployment for awhile.

In "Downsized Executives Forced To Take 'Survival' Jobs," Michael Luo (New York Times, March 1, 2009) provides a case in point, i.e. a former security manager who currently works at a friend's cleaning company. While there is no question that the dichotomy between career desires and reality can be punishing, financially and emotionally, one has to applaud this man's work ethic and sense of integrity. He gets a gold star in my book.

Countless headlines excoriate Wall Streeters for getting bonuses tied to sub-par performance. Yet others go about the business of life, quietly and without fanfare. That such noble folks take responsibility should bring a smile to everyone's face, don't you think?