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!

Creating A Life Plan Before It's Too Late

In case you missed the announcement, today is part of a seven day celebration of National Retirement Security Week. The event is sponsored by the National Association of Government Defined Contribution Administrators, Inc. ("NAGDCA") and stems from Congressional action to:

  • Apprise employees about the need to be retirement ready in terms of personal finances;
  • Educate individuals about various ways to save for retirement; and
  • Help employers encourage their employees to save more.

While true that it's essential to address issues such as expected lifespan, job mobility, the power of compounding and taking advantage of a company match, money is not the only end goal. One could have a substantial piggy bank but end up lonely or in search of something satisfying to do. According to "How to Retire Happy" by Stan Hinden (AARP Bulletin, September 2014), it is important to ask what comes next. Some persons end up spending more time in retirement than the number of years they worked. Kerry Close reports for Time Money that a "record high number of retirees" are unhappy. She cites an Employee Benefit Research Institute study that shows a big drop in "very" satisfied retirees from 60.5 percent in 2012 to 48.6 percent in 2016.

One suggestion is to create (or update) a life plan, even if you are far from the gold watch party. According to a blog post by consultant and writer Royale Scuderi, this document should summarize "where you are now in all the areas that matter to you, where you want to improve and what you'd like your life to look like in the future." Easier said than done, pondering the big picture can be challenging but enlightening as well. As someone who is updating her life plan right now, I find the effort worthwhile. Acknowledging that you cannot recapture time reinforces the concept that one should be reflective about the past, grateful for the present and excited about the future. As Anthony Hopkin's character said in Meet Joe Black, the years go by "in a blink."

For those who want to give it a go, check out the the narrative provided by life coach Michael Hyatt. Earlier this year, he co-wrote Living Forward: A Proven Plan to Stop Drifting and Get the Life You Want with Daniel Harkavy. An online search yields additional educational resources. (Note: This blogger has no relationship with Michael Hyatt.)

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.

Retirement FinTech Gets Another Suitor - Goldman Sachs

No sooner had I written "Financial Technology and the Fiduciary Rule," an invitation to the Future of Finance 2016 appeared in my in-box with the call-out that "Technology is about to revolutionise financial services." (Note the British spelling for this Oxford conference.) Based on session titles, attendees will hear about topics such as how technology can:

  • Be "used to build trusting relationships with clients" and increase transparency;
  • Substitute for "expensive human intermediaries" to lower costs; and
  • Encourage the creation of "simpler and cheaper" insurance and savings products.

Increasingly, angels and venture capitalists are waking up to the fact that the global retirement marketplace is big and ripe for innovation. Earlier today, Goldman Sachs Investment Management Division announced its intent to acquire Honest Dollar. According to CrunchBase, this transaction follows a seed financing last fall to further build a web and mobile platform that allows small businesses to cost-effectively set up retirement plans. Expansive Ventures led that round that includes former Citigroup CEO Vikram Pandit and, founder of The Black Eyed Peas musical group.

Yet another indication that investors see "gold in them thar health care and retirement plan hills" is a $30 million capital raise for a company called Namely. Its February 23, 2016 press release lists Sequoia Capital as the lead venture capital firm for this round, bringing its total funding so far to $107.8 million for this "SaaS HR platform for mid-market companies."

Interestingly, in articles about both Honest Dollar and Namely, the tsunami of complex regulations is cited as a reason why employers need help from financial technology organizations. With mandates growing and becoming more muscular, no one should be surprised if cash-rich backers write big checks to financial technology businesses. As Xconomy reporter Angela Shah points out, multiple start-ups are "trying to compete for the 80-plus percent who don't offer benefits."

There is no doubt that the competitive landscape is changing and will prompt more strategic soul-searching for vendors and policy-makers alike. I've listed a few of the many questions in search of answers as things evolve.

  • Will other large financial service organizations like Goldman Sachs swallow up smaller start-ups? If so, does that change the role of angels and venture capitalists?
  • If enough of these companies pop up to serve small businesses and self-employed persons, is there still a need for the product offered by the U.S. government - myRA?
  • Will the U.S. Department of Labor fiduciary rule, if passed into law, accelerate the formation and growth of financial technology companies? If so, how?
  • Will there be a need for more or fewer financial advisors as the financial technology sector grows?
  • Will individuals buy more insurance and savings products? If not, why not?

Life in financial services land will never be dull.

Is Seventy the New Thirty?

Last year, the Today show celebrated Tao Porchon-Lynch for inspiring others with her verve for life. At ninety-six years of age, she is recognized by Guinness World Records as the oldest yoga teacher and still going strong. Yoga Journal quotes her as saying "I don't want to know what I can't do. I'm only interested in what I can do."

Mental Floss Magazine likewise inspired with its article entitled "10 People Who Switched Careers After 50 (and Thrived!)." Writer Ethan Trex waxed poetic about the accomplishments of seniors such as Colonel Sanders, Tim and Nina Zagat, Ronald Reagan and Laura Ingalls Wilder. Business Insider's Richard Feloni urged readers that it's never too late to follow one's dream, citing exemplars such as Vera Wang, Julia Child, Henry Ford, Grandma Moses and Taikichiro Mori in "20 People Who Became Highly Successful After Age 40."

Hollywood appears poised to convey a similar message about the advantages of wisdom and experience for those who are no longer twenty-one. In "The Intern," Robert De Niro plays a seventy year old widower who is not ready to retire. An ex-sales and marketing executive, his character joins a start-up company as an intern to the CEO and quickly grabs the hearts and minds of his younger co-workers. In "A Walk in the Woods," Robert Redford and Nick Nolte are septuagenarians whose characters are based on the bestselling book by Bill Bryson. They hike the Appalachian Trail, rekindle their friendship, evade grizzly bears and remember how nice it is to keep trying to challenge one's self. In "I'll See You In My Dreams," Blythe Danner discovers romance and purpose past sixty.

The implication seems to be that many individuals around the world prefer to keep working. According to the UK newspaper, the Daily Mail, "One in 20 people still have a job when they're over 70 - a figure that has doubled in the past decade..." USA Today's Rodney Brooks interviewed various individuals who extolled the virtues of never retiring, even though they could afford to stop working. In some cases, the goal was to try something altogether different.

George Burns "began a solo career when he was nearly 80." Although he missed his engagement to perform in London on his centennial birthday by a matter of months, he urged people to keep in mind that "You can't help getting older, but you don't have to get old."

With that truism in mind, one cannot forget that it takes money to:

  • Retire early;
  • Forego the salary and benefits of a steady job to tackle something new like start a company; and/or
  • Live large on a fixed income only.

For some individuals, the gap between one's retirement piggybank and monetary requirements is a reason to return to the workplace or never exit in the first place. For others, there is a true passion to stay in the game, whether that entails work, volunteering or something else. Most people strive for the ability to choose. That in turn requires a commitment early on, and thereafter, to identify, measure and effectively mitigate retirement portfolio risks.

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?

Beauty Makeovers and the Retirement Industry

As I milled around the counters last Sunday during a private shopping event, I was reminded how much fun it is to try out new products. Certainly the roughly $400+ billion beauty industry has realized to great effect that the concept of a makeover and the lure of a new look can generate profits. If the consumer likes a product, there is a strong likelihood that he or she will buy it again when the first bottle is finished. Indeed, some cosmetic and skincare retailers offer sign-ups to ensure regular deliveries of favorite creams and gels. Make no mistake however. The purchasing experience itself is an important part of the process. Those organizations that recognize the allure of feel, smell and touch are raking in the dough. According to "The Sephora effect: How the cosmetics retailer transformed the beauty industry" by Sarah Halzack (The Washington Post, March 9, 2015), brand loyalty has given way to plunking down dollars "in a place where you can easily test virtually any product." Buyers have constant access to information, in large part due to social media marketing. "They don't have to go to a counter to get that education."

Although lipstick and Individual Retirement Accounts ("IRAs") may seem like polar ends of the consumption spectrum, there are enough similarities that financial services marketing executives may want to spend some time perusing the powder and perfume aisles. To curry favor with investors who find it hard to differentiate among savings vehicles, savvy sellers are starting to recognize the importance of making the buying process "fun" and "lively." Offering a financial "beauty makeover" with encouragement about a better future is one way to establish a meaningful dialogue between an advisor and an investor. Being transparent and showcasing multiple products is another strategy.

Things are changing from Wall Street to Main Street but there is room for improvement. In "Creative Content Marketing for Financial Services: 3 Examples" (Chief Content Officer Magazine, March 7, 2013), Kevin Cain points out that "...the industry seemingly operates under the misconception that its heavy regulatory burdens both preclude and exempt it from taking a creative approach to content" and should embrace "the style and delivery of the message." He then illustrates the tact taken by three financial service firms to attract and retain business.

Sentient marketing and a dash of pizzazz may soon become a necessity if the financial services industry wants to sell to the younger generation. As the Society of Actuaries website informs, those in their twenties and thirties are expected to "make up 50 percent of the U.S. workforce by 2020" and therefore represent "a sizable market for financial products." To reach these millennials, TIAA-CREF executives, Richard Pretty and Jonathan Gentry, urge firms to: (a) explain both short-term and long-term planning issues such as paying off student debt while seeking to put money aside (b) recognize the imperative of digital communications and engage Generation Y accordingly (c) leverage the influence of parents and peers and (d) describe the vagaries of the capital markets and "restore confidence in investing." They may need to act fast if they want to compete with robo advisors. As Marlene Y. Satter writes in "Wealthy millennials want automated retirement" (Benefits Pro, April 28, 2015), a new study from Global Wealth Monitor will eschew the "personal touch in retirement planning" in exchange for online tools and analysis.

Those planning for retirement may not get a free lipstick but snappy interactions with prospects and existing clients are likely just the beginning of the brave new world of financial services marketing. Competition with robots and clarion calls for lower fees challenge service providers even further.

National Doughnut Day and Retirement Plans

In case you didn't know, today is National Doughnut Day. According to ABC News, Cumberland Farms and Krispy Kreme are a few of the sellers that are giving out freebies in celebration of this longstanding holiday. In its May 28, 2015 press release, Dunkin' Donuts (another participating retailer) informs that the holiday has been around since 1938, having been created "to honor women who served donuts to soldiers during World War I." The history of this sweet treat goes back even further. Smithsonian Magazine chronicles the popularity of the doughnut, citing its introduction to Americans by the Dutch when Manhattan was called New Amsterdam. Since then, sales have soared with 2012 doughnut store revenue reported at $11.6 billion.

Presumably free doughnuts generate sales of other products like coffee or tea and that is one motivation for holiday largesse. Another motivation for giving things away has to do with product branding. The Chief Marketing Officer Council website touts a 2015 global estimate of $540 billion as the amount that companies expect to spend on advertising. I experienced this firsthand when I recently spoke at the Government Finance Officers Association annual conference. Before my session, I perused some of the booths in the exhibition hall. I now have stress balls, pens and tote bags that sponsors gave away in droves to ensure continued name recognition. Two days ago, the subject of branding came up again when I met with the general counsel of a large financial institution. He specifically used the term "building the brand" when describing transparency and good governance as a way to differentiate his firm's offerings to pension funds, endowments and family offices.

This got me thinking about benefits that employers offer to attract new employees and retain existing talent. Jen Schramm writes about a 2014 survey in "Which Benefits Attract Highly Skilled Workers?" (Society for Human Resource Management, April 1, 2015), stating that health care, retirement and leave arrangements "were the top benefits used to retain employees at all levels of an organization." This finding leads to logical questions about (a) how employers are branding the benefits offered in seeking to fill jobs and (b) whether only well-funded and viable plan benefits get promoted to newcomers and existing workers.

Understanding some basics about branding helps. Mark Di Somma recently addressed the seven R's of a powerful branding strategy to include the following:

  • Resonance - Does a brand "talk to people's needs in ways that feel personal, relevant and wonderful?"
  • Resilience - Does the brand create a competitive advantage?
  • Results - Will the brand add to the bottom line?
  • Resolution - Is the brand inspiring and "Does it align with the vision and the purpose?"
  • Radiation - Will the brand generate positive conversations?
  • Redefinition - Does the brand dazzle or simply move the deck chairs around?
  • Recognition - Does a brand build on what customers (in my example, employees and prospects) already know?

His points can be applied to the offering of various benefits and related communications with participants. Based on my experience as a forensic economist, numerous cases on which I have worked in the last few years allege poor communications and rescinded benefits (even when perception differs from reality). In brand parlance, this means there is low resonance, low resilience and low resolution. Participants do not feel that the benefits meet their needs. Increased costs relating to factors such as longevity are reducing the bottom line and forcing lots of companies to rethink whether certain benefit programs should be maintained. Underfunded and badly managed benefits can lead to negative "radiation" as reflected in the growth of putative ERISA class actions with multiple disgruntled employees willing to serve as plaintiffs.

The topic of benefits "branding" (i.e. using benefits to attract and retain talent as a way to create enterprise value) is far from trivial. Companies throughout the world are seeking to balance the costs of offering benefits against the hope that a generous HR mix helps shareholders too. It is certainly food for thought, in between bites, for those who plan to munch on a free doughnut today.

Employee Ownership and ERISA Litigation

I had the pleasure of speaking at the sold-out National Center of Employee Ownership ("NCEO") conference on April 21 about board education, compensation metrics and procedural prudence. Consonant with NCEO's commitment to providing trustee and director education about Employee Stock Ownership Plan ("ESOP") administration and governance, my co-speakers and I fielded lots of questions from the audience relating to insurance coverage, selection of directors, board composition, training, governance red flags to avoid and long-term versus short-term strategy.

In conversing with some of the ESOP company CEOs and independent trustees who traveled to Denver for this annual convening (last held in Atlanta), the message was clear. Employee ownership is working for their respective companies. The sentiment struck me as quite different from what I heard last week when I attended the American Conference Institute meeting about ERISA litigation. Post Dudenhoeffer (courtesy of the U.S. Supreme Court), there seems to be a lot of caution on the part of large company counsel about how much equity should be in the hands of employees.

Clearly, facts and circumstances will determine the appropriateness of any particular structure. That said, results of a recent survey reflect a growth in employee power, at least as of several years ago. According to NCEO's research project director, Nancy Wiefek, the tabulated results show that 214 Employee Stock Ownership Plans commenced between 2001 and 2012, a rise of 44 percent from earlier periods. Out of 502 ESOP company responses, 317 were reported as fully owned at 100 percent. Click here to read more about the complete survey.

Whether the 2014 Dudenhoeffer decision will have an impact on the mostly private businesses that consider ESOP implementation remains to be seen. For now, it is important that venues exist to allow for an exchange of ideas about what works and what to avoid, should a company's management decide to embark on putting company stock in the hands of employees.

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!

X Marks The Spot Approach to Pension Risk Management

Anyone who has been on the receiving end of major surgery may tremble after reading "How to Make Surgery Safer" (Wall Street Journal, February 16, 2015). Journalist Laura Landro describes a panoply of horribles such as operating on the wrong body part or leaving a foreign object inside a patient's body. Honing in on "never events" (i.e. those that are serious and should never occur), she describes attempts by hospitals to reduce human error in a quest to contain the rate of injury, minimize the number of deaths and avoid the billion dollar whack for serious faux pas. Besides the collection and analysis of big data to glean lessons learned and track performance, the writer describes how operating room teams are being prepped to emphasize safety in numerous ways. These include, but are not limited to, the following:

  • Adding radio frequency tags to instruments and sponges;
  • Empowering nurses to override a doctor's orders to wrap up if questions exist about missing items;
  • Convening as a team to agree on strategy before any cuts occur;
  • Identifying ahead of time what procedure should take place and on what part of the body;
  • Training all staff about how to use electrical equipment;
  • Creating, and then following, an appropriate checklist; and
  • Asking patients to actively participate by getting into good shape ahead of time and scrubbing with anti-bacterial soap prior to surgery.

In the pension world, setting a risk management objective by proverbially marking the target spot with a big X merits consideration. After all, if the goal (or set of goals) is vague or flat out wrong, chances are that the "operation" will fail. Should that happen, the "patient" (i.e. participants) could suffer.

The concept of proper goal-setting is far from trivial. Fiduciary breach allegations are undeniably here to stay, courtesy of an increasingly active plaintiffs' bar. Settlements can cost sponsors millions of dollars, even when a company feels strongly that it has done everything correctly. Changing regulations could up the ante. According to "President Obama to Address DOL Fiduciary Redraft at Monday AARP Meeting" (Think Advisor, February 22, 2015), proposed standards put forth by the U.S. Department of Labor appear to be moving closer towards some type of final conflict of interest rule. In a January 13, 2015 memo, the White House seems to be taking the view that retirement plan fees are often too high and have cost savers more than $6 billion. No doubt the financial industry will continue to rebut these estimates.

Based on my experience as a forensic economist and someone who has served as a testifying expert, goal-setting is hugely important when it comes to resolving disputes. An inevitable question is whether something went awry and, if so, what monetary damages should be paid (and to whom). Answering inquiries about whether wrongdoing occurred (and its magnitude) has to start with identifying the objective(s) and then examining the achievement of said goals (or lack thereof).

Similar to the health care profession, continuing to up its game in terms of process improvement, retirement plan sponsors (and their service providers) have a vested interest in creating goals that are (a) clear (b) measurable (c) realistic and (d) appropriate for the situation at hand.

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.

Retirement Planning Involves Many Factors

Whenever I teach an investments course, I ask the students if their vision for retirement involves penny pinching or taking luxury cruises. Once the silly ideas are tossed away ("I want to be a millionaire by twenty-five but don't plan to save"), the seriousness of what could happen (absent focus and discipline) starts to set in. There is no magic potion. Deciding how much to set aside, when one can retire and how to invest and still sleep at night are far from trivial questions.

In today's New York Times, Elizabeth Olson writes about "When Outside Factors Dictate Retirement Age." Her sense is that life expectancy, fears of age bias and "changing technological demands of the workplace" could materially influence when an employee punches the clock one last time.

Not everyone concurs that leaving the work force earlier than originally planned makes sense. According to "The anti-retirement plan: Working 9-to-5 past 65" (October 3, 2014) Washington Post reporter Jonnelle Marte describes one segment of the population that happily sprints each day to join colleagues for another eight hours. Historical U.S. Department of Labor statistics show that "employment of workers 65 and over increased 101 percent, compared to a much smaller increase of 59 percent for total employment (16 and over)."

The topic of retirement planning is not new but is certainly grabbing policy-makers' attention, in the United States and around the world. The macro implications are far-reaching from a collective perspective. Too few savers can put a drain on a country's resources and ability to grow its economy.

From the viewpoint of each household, the importance of taking individualized facts and circumstances into account as part of retirement planning remains as true today as it was ten, twenty or thirty years ago. For example, some people want to stay active because working is fun for them. Others groan. As famed basketball coach Abe Lemons said "The trouble with retirement is that you never get a day off."

Santa Claus and the Fiduciary Standard

At this time of the year, when Santa Claus is making his list of who has been naughty and nice, optimists rub their hands in glee, anticipating a stocking full of goodies. Pessimistic believers resign themselves to something worse. In pension land, if you embrace fiduciary change, the incoming head of the U.S. Senate Finance Committee may be about to hand you the proverbial lump of coal.

According to Washington Bureau Chief Melanie Waddell, Senator Orrin Hatch intends to push anew for the passage of his Secure Annuities for Employee Retirement or "SAFE" Act. He spoke about pension reform and the "pension debt crisis" on July 9, 2013 in his "Introduction of the SAFE Retirement Act of 2013."  His objective is to "stop the Department of Labor from writing fiduciary rules for individual retirement accounts" and "over-regulating IRA investment advice." See "Sen. Hatch's 2015 Priority: Torpedo DOL Fiduciary Efforts" (Investment Advisor Magazine, December 15, 2014).

Put forward as a Conflict of Interest Rule-Investment Advice, the U.S. Department of Labor seeks to "reduce harmful conflicts of interest by amending the regulatory definition of the term 'fiduciary' set forth at 29 CFR 2510.3-21(c) to more broadly define as fiduciaries those persons who render investment advice to plans and IRAs for a fee within the meaning of section 3(21) of the Employee Retirement Income Security Act (ERISA) and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account current practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as changes that have occurred in the investment marketplace, and in the ways advisers are compensated that frequently subject advisers to harmful conflicts of interest."

As with any mandate, if approved, some will be impacted more than others. In its "DOL 2014 Fall Regulatory Agenda," ERISA attorneys Fred Reish, Bruce Ashton and their Drinker Biddle & Reath LLP colleagues assert that broker-dealers and their registered representatives will likely bear the brunt of new rules. They write that "Adoption of an expanded definition will likely affect both the status for broker-dealers as fiduciaries and their compensation (due to the fiduciary prohibited transaction rules of ERISA). In response, these broker-dealers may need to develop RIA fiduciary programs for advisors who focus on retirement plans and decide how to manage the plan business of those who do not."

Whatever your holiday preference may be, keep a look out for the "gifts" that 2015 has in store for plan sponsors and their service providers.

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).

Love What You Do and Do What You Love

We are movie aficionados in our family and try to see a variety of celluloid offerings, as time permits. We recently had the pleasure of seeing an uplifting motion picture entitled St. Vincent. Bill Murray plays a grumpy man who, at first glance, seems unlikely to warm any hearts. Over time, however, the audience learns that he is a good guy, a war hero and a kind person. He befriends the little boy who moves in next door and, no surprise, inspires smiles all around. At the end of the film, as the credits roll, there is a scene where Bill Murray is enjoying a quiet moment in his modest backyard, singing along to Bob Dylan's "Shelter From The Storm." Maybe because the song is lyrical or people were curious about the scene, they stayed and listened.

Although Bob Dylan was a musician from an earlier generation, he remains an admired talent and is recognized for his vast body of work. According to an October 2014 Rolling Stone article, Dylan is so prolific that The Lyrics: Since 1962 includes nearly one thousand pages and weighs "approximately 13 and a half pounds." In his early 70's, he is still giving live concerts.

There is something magical about being excited about music, friends, work and play. Famed author Ray Bradbury who died a few years ago at age 91 was quoted as saying "Love what you do and do what you love."

I certainly enjoy the challenges of providing forensic economic analyses and investment risk governance consulting. Colleagues and attorneys I know (some of whom are clients) often say that they are proud to be making a difference. That purpose and excitement about time well spent applies to others I know who are far removed from law or business. One friend (now sadly deceased) used to find great pleasure in selling office supplies and being able to interact with her customers.

Though it did not generate box office mojo, "Hector and the Search for Happiness" made the point that the pursuit of happiness may be trumped by the happiness of pursuit. Inspired by a book with the same title and authored by Francois Lelord, a French psychiatrist, the film referenced the mind-brain link of living a life with joy. It turns out that anyone with access to a computer can now take "The Science of Happiness," courtesy of the University of California - Berkeley and professors from the Greater Good Science Center.

Whether you are heading towards retirement or solidly part of the workforce, keep Bobby McFerrin's words in mind. "Don't worry, be happy." It's a good way to live life.

Retail Investors and Derivatives Trading

During a catch-up conversation, a now-retired colleague told me how much money he was making by trading options. Based on several recent articles, it seems that he is not alone in looking to Wall Street instruments in hopes of an income boost or a way to hedge uncertainty. In "Retail Investors Flock to Derivatives for Income and Safety" (, October 31, 2014), senior reporter Dan Freed describes a growing trend in trading options and futures, with growth rates that exceed the level of purchases and sales of stock. On November 3, 2014, the Options Clearing Corporation reported a 22.32 percent rise in total equity and index option volume in October 2014 from one year earlier, "the second highest monthly volume on record behind the August 2011 record volume of 554,842,463 contracts" or a year-to-date volume of 3,673,768,194 contracts.

Reuters journalist Chris Taylor describes the average options trader as 53 years of age, citing Options Industry Council statistics that put nearly thirty percent of those who trade options at between "the ages of 55 and 64." However, in "New baby boomer hobby: trading options" (July 9, 2013), even retirees with a high net worth are cautioned to educate themselves about the downside of leverage. Mary Savoie, Executive Director of the Options Education Program, talks about the free resources made available by the Options Industry Council.

Critics counter that formal training cannot replace experience and that retirement assets should be invested with a long-term goal in mind, especially for those individuals with a low net worth. What they may not realize is that numerous retirement plans are chockablock with exposure to derivatives in the form of investment funds that trade swaps, options and futures. In mid-September of this year, Bloomberg reporters Miles Weiss and Susanne Walker wrote that then PIMCO senior executive and co-founder of the Pacific Investment Management Company Bill Gross "sold most of the $48 billion of U.S. Treasuries held by his $221.6 billion Pimco Total Return Fund (PTTRX) in the second quarter, replacing them with about $45 billion of futures. In "SEC Preps Mutual Fund Rules," Wall Street Journal reporter Andrew Ackerman (September 7, 2014) cites a concern on the part of the U.S. Securities and Exchange Commission about the use of derivatives by certain mutual funds and could seek "to limit the use of derivatives in mutual funds sold to small investors, including both alternative funds and certain 'leveraged' exchange-traded funds, volatile investments that use derivatives to double or even triple the daily performances of the indexes they track..." 

Over the years, I have traded derivatives, valued derivatives, reviewed financial models, created hedges and stress tested deals for compliance purposes. Throughout that time, the global markets continue to grow, attesting to their popularity. Earlier this summer, the Bank for International Settlements measured the over-the-counter derivatives market as having expanded to outstanding contracts with a value of $710 trillion at yearend 2013, up from $633 trillion in a single year.

Whether singular derivative transactions are appropriate for any one individual plan participant depends on a number of factors. Suffice it to say, derivative instruments are here to stay. It would be incorrect to underestimate the ubiquitous nature of derivatives. Besides asset managers who use derivatives, there are plenty of structured products that layer in derivatives with traditional equity or fixed income securities.

Stay tuned for more from the regulators about the usage of derivatives and asset management. In the aftermath of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, rules about derivatives trading and clearing are changing the operational and technology landscape. Fund directors not already in the know are being urged to pay attention to the economic impact on fund activity when derivatives are used. Click here to download a good risk management checklist. It is part of a November 8, 2007 speech by Gene Gohlke, then Associate Director, Office of Compliance Inspection and Examinations, SEC. Entitled "If I Were a Director of a Fund Investing in Derivatives - Key Areas of Risk on Which I Would Focus," Attorney Gohlke addresses the panoply of due diligence considerations such as custody, pricing and valuation, legal, contractual, settlement, tax, performance calculations, disclosure, investor reporting and compliance. These are important knowledge areas for investors too.

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.

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.

Jersey Boys and Working at 80

If you are looking for a few hours of musical fun and a good rags to riches story, I recommend Jersey Boys. I had the pleasure of seeing the stage production in Las Vegas last year. I liked it so much that I am seeing the Broadway show later this summer. The movie is equally fine although a theatrical aficionado may find the drama with music less exciting than music with a bit of drama. Besides the entertainment factor (and I give the film a thumbs up), the original endeavor and global touring companies continue to spin foot-thumping sounds into commercial gold. According to "'Jersey Boys' has been a windfall for all involved" by L.A. Times writer David Ng (June 21, 2014), worldwide grosses exceeded $1.7 billion in March with more than "20 million people in 10 countries," counting themselves as lucky audience members.

What you may find notable is that some of the talented contributors passed twenty-one a long time ago and yet demonstrate that one can keep working, if desired, for many years. Clint Eastwood was both a producer and director of the movie. He is eighty-four years old. Frankie Valli was an executive producer of the movie, helped to develop the stage deliverable and is still singing live at the age of eighty. Christopher Walken does a marvelous job as a celluloid version of Valli mentor, Gyp DeCarlo. He is seventy-one years old. Bob Gaudio, the magical hit-maker for the Four Seasons and member of the Songwriters Hall of Fame, has been front and center in the making of the play and movie. He is seventy-two years old.

These individuals are not alone in continuing their presence in the work force. Forbes staffer Halah Touryalai cited a Wells Fargo study that 30% of polled "middle-class American[s] believe they will need to work until they are at least 80-years-old in order to retire comfortably" but may not have the okay from employers. See "More American Say 80 Is The New Retirement Age" (October 23, 2012). New York Daily News reporter Heidi Evans refers to 80 as the "new 50." NBC News recently reported that creative seniors are setting up consulting practices, starting businesses, seeking jobs with non-profits or working part-time. See "Retirees Keep One Foot in the Workforce" by Shelly Schwartz (April 8, 2014). Great Jobs for Everyone 50+ by Kerry Hannon addresses opportunities by category such as snowbirds or retired teachers as does the AARP in its 2011 guidance for those who head south for sun when bad weather in winter looms.

Some say that age is an illusion in terms of what one can do. Famed wit George Burns is quoted as saying that "You can't help getting older, but you don't have to get old." Sadly Mr. Burns did not appear for his famed booking at London's Palladium to celebrate 100. A bad fall led to its cancellation and he celebrated this marker elsewhere. In "Curtain Falls: George Burns Dies at 100" (Seattle Times, March 10, 1996), reporter Howard Reich writes that Burns extolled the virtues of passion about what one does, adding that "If you can fall in love with what you're going to do for a living, you got it made." Hear, hear for the motivational cue.

From an economic perspective, global demographics open the door wide to tremendous business opportunities for financial service companies. Providing advice to seniors as well as employers that want gray matter is one promising area. Restructuring existing retirement plans is yet another. Consider the recent announcement that BT Retirement Saving Scheme has arranged for longevity insurance and reinsurance "to provide long term protection to the Scheme against costs associated with potential increases in life expectancy of members." The 16 billion GBP is "the largest ever in the UK and involved the creation of the BT Pension Scheme's own insurance company." See "BT Adds Longevity Insurance to Limit Risks of Pension Plan" by Amy Thomson and Sarah Jones (Bloomberg, July 4, 2014).

Enjoy the popcorn, watch the summer flick and then ponder what you intend to do with the rest of your life. If that means putting together your business plan for creating value-add services to companies and individuals in this new era, go for it. There are lots of ideas for profit.

Church Pensions

During a brief visit to Rome, I stayed in a room that literally overlooked this majestic dome, statues and all. It is part of St. Peter's Basilica, was designed by Michelangelo, has an estimated diameter of 42 meters and a height of 136 meters. It is possible to climb to the top for a sweeping view of Rome although the lines of tourists are long.

Being a few hundred feet away from the global seat of the Catholic church and because I research and analyze investment issues, including pensions, I wanted to know if a pope receives a pension. As it turns out, there is such a thing as a papal pension, now that one pope has officially retired. According to Slate journalist, Abby Ohlheiser, ex-pope Benedict XVI will receive a monthly stipend of 2,500 euros or about $3,200, depending on the prevailing U.S. dollar - euro exchange rate. She writes that the amount is comparable to what a bishop would receive upon retirement and that the pope carries the title of the Bishop of Rome. In addition, he will receive meals, housekeeping and access to the "Vatican's generous health care plan." Rent will cost him nothing as he alternates between the Castel Gandolfo in the summer and newly renovated digs in the convent of the Mater Ecclesiae during the rest of the year. Should he be promoted to cardinal emeritus, his monthly stipend will rise to 5,000 euros or nearly $80,000 to spend as he sees fit. See "What Type of Retirement Package Does an Ex-Pope Get? A Big One." In a February 28, 2013 essay on this topic, NBC contributor A. Pawlowski points out that the ex-pope's allowance is just shy of the maximum amount a U.S. senior citizen might be able to get each month from Social Security, subject to past income levels and only if the intended recipient waits until at least age 70 to retire. In the case of ex-pope Benedict XVI, he asked to be relieved of his job duties at the age of 85, citing health concerns. See "How the Pope's Retirement Package Compares to Yours."

More broadly, across the pond from Europe, plaintiffs have been challenging the status of certain church plans, asserting that these plans should not enjoy exemptions from ERISA. In at least one case to date, a federal judge has allowed a putative class action to move forward on the basis that an alleged church plan is subject to ERISA and needs to remedy its $1.2 billion underfunding. See "Dignity Health not exempt from federal pension rules, court finds" by Kathy Robertson (Sacramento Business Journal, December 30, 2013). I will address this topic in a separate post as it is important and timely and deserves its own commentary.

Shrinking Job Market and Adverse Impact on Pension System

Stephen D. Rosenberg, Esquire, has a nice companion piece to my September 9, 2013 post entitled "Gloomy Jobs Outlook and Impact on Retirement Planning." I recommend his analysis of what we both believe is a dire situation that is getting worse. In "Why Jobs are Job 1, to Steal from an Old Ford Ad" (September 11, 2013), this ERISA litigator and compliance attorney writes that "There are a lot of costs to a shrinking and/or severely curtailed job market, from the personal costs to those who can’t get jobs, to the long term reduction in earnings for those who must wait years beyond graduation to really get started on a profitable work life, to the inability of many to retire after job losses and stock market losses struck them in the latter part of their work lives."

More to come...

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."

$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.

Registered Investment Advisor (RIA) Fiduciary Liability Risk

According to "Do plan advisers understand their risks?" by Rich Fachet (Investment News, October 8, 2012), some financial careerists may be woefully unaware of the risks they face as ERISA fiduciaries. The author, team leader with The Travelers Cos. Inc., goes on to say that the U.S. Department of Labor is serious about enforcement with $1.38 billion having been collected in 2011 "through prohibited-transaction corrections, restoration of plan benefits or the voluntary fiduciary-correction program." He adds that RIAs face both personal and professional liability. Whether tasked with discretionary authority over how to allocate an ERISA plan portfolio or giving advice with limited control over assets, these investment professionals have a lot to lose. Fachet lays out what kind of information should be gathered as a step towards mitigating fiduciary risk. The list includes, but is not limited to, the following tasks:

  • Assessment of the nature and magnitude of liability, taking new regulations such as ERISA 408(b)(2) into account and the potential cost of non-compliance;
  • "Lessons learned" from lawsuits that plaintiffs' counsel has won;
  • Determination of ERISA 404(c) "safe" versus "unsafe" harbors and how to counsel a plan sponsor as a result;
  • Review of "plan participant  options and models" as well as asset allocation percentages; and
  • Analysis of insurance gaps to include a review of adviser errors and omissions, professional liability, fiduciary liability and/or ERISA bond coverage.

Gary J. Caine, FSA, with Multnomah Group, Inc. addresses the flip side, i.e. that ERISA fiduciaries must carefully vet investment advisers before they are hired and thereafter. In "Fiduciary Reliance on Registered Investment Advisors," he suggests that plan sponsors need to minimally ask about qualifications such as education, experience in assisting plans, professional designations and securities licenses. Conflicts of interest, liability insurance coverage and compensation arrangements are other areas to investigate.

Notwithstanding the need to carefully assess which registered investment advisers are appropriate partners for ERISA pension plans, merger and acquisition ("M&A") activity in this sector continues. According to a new study produced by Schwab Advisor Services, "year-to-date assets under management (AUM) for M&A deal activity reached $42.3 billion at the end of the third quarter, which nearly eclipses last year's AUM total of $43.9 billion.". See "New Clients Drive Steady Growth for Independent Advisors in Face of Uncertain Economic Environment, Say 2012 RIA Benchmarking Study From Charles Schwab" (July 17, 2012 press release).

With Retirement Savings Week just wrapped up on October 27, 2012, experts write that many individuals are still woefully unprepared for post-employment life. In "Retirement 'Savings Week' highlights savings gap," Market Watch reporter Elizabeth O'Brien describes a study from the Employee Benefit Research Institute ("EBRI") on October 22, 2012 that says that 44 percent of simulated "lifepaths" bolsters the reality of inadequate income for one's "golden years."

A glaring take-away from all of this is that registered investment advisers will have a large client base as long as people need help with retirement planning.

Seniors Get Fresh Start in The Best Exotic Marigold Hotel

Watching The Best Exotic Marigold Hotel movie for a second time in the last few weeks, I was struck anew by the import of its message that it is never too late to grab the brass ring. The story centers on a group of senior citizens who find themselves at a delapidated hotel in India on the heels of disappointments and regrets. The writing is fine. The music is upbeat. The acting inspires.

In one scene, a high court judge announces that "today is the day" for a new beginning. He promptly retires and heads off to India to search for a childhood friend. In another scene, a widow left with debt and memories of a shallow marriage offers that failure is not trying. Yet another of the film's characters announces that companionship with a local lovely has taken him to the top of the mountain because he is lonely no more. One character finds herself needed once again as she assumes a managerial role to get the rundown inn in good enough shape to attract paying customers. By doing so, she gives the young owner a chance to realize his dream of being successful, marrying the woman of his choice and making his mother proud.

At a time when so many are living longer than ever before, thinking about the possibilities of tomorrow is an important thing to do.

In "Boomers Get a Life After Retirement" (Psychology Today, February 2, 2011), Dr. Nancy K. Schlossberg describes six different categories of boomers with respect to life after retirement.

  • "Continuers" apply skills and interests that served them well before retirement but in a new way.
  • "Adventurers" retool for the job they always wanted but never had.
  • "Searchers" take a trial and error approach to identifying what works best for the golden years.
  • "Easy Glides" take it easy.
  • "Involved Spectators" apply what they learned during their respective careers to be helpful volunteers or develop hobbies.
  • "Retreaters" ponder what's next, removing themselves from social interaction, at least for awhile.

Wherever you are in life, whatever category of boomer you are or aspire to be, take a few minutes and see "The Best Exotic Marigold Hotel." You will laugh. You will cry. You will think about how important it is to keep moving forward. As the film's young hero says, "Everything will be alright in the end so if things are not alright, it is not the end." What a lovely sentiment.

Public Pension Reform is Seen as Urgent

According to "State Pension Reform, 2009-2011" by Ron Snell (National Conference of State Legislatures, March 2012), all but seven states have made "major changes" in order to lower pension fund obligations. Increasing employee contributions, reducing employer contributions and/or tightening up age and service requirements that dictate when someone can retire are a few of the reforms underway. Modifying how benefits are calculated, offering limited benefits to new employees and replacing defined benefit plans with defined contribution plans are a few of the action steps taken by legislators who worry that there is not enough money to maintain the status quo.

For a state by state listing of the types of retirement plans in place, check out the "Checklist of State DB, DC, and Other Retirement Plans" by Ronald K. Snell (National Conference of State Legislatures, January 2012).

While the pace of change has been noticeably faster in the last few years than ever before, budget reformers still angst about whether various courts will prevent reform by insisting that benefits are guaranteed pursuant to the terms of a given state's constitution and therefore cannot be altered.

Palm Beach Post reporter John Kennedy reports that workers in the Florida Retirement System may not have to add 3 percent to their pensions if the highest court in the state rules that doing so would violate its governing dictates. See "Challenge of Florida's forced pension contribution goes to Supreme Court" (March 16, 2012). In "Pension-deal danger: Vote twist leaves door open to lawsuit," New York Post reporters Fredric U. Dicker and Erik Kriss explain that a new pension tier system, signed into law by Governor Andrew Cuomo on March 16, 2012 may face a legal block by "Senate Democrats or one of the public-employee unions that are trying to fight this." As described in "Untouchable Pensions May Be Tested in California" by Mary Williams Walsh (New York Times, March 16, 2012), cities in the Golden State may be barred from enacting reform because of binding provisions in the state constitution. Whether a financially troubled municipality that files for bankruptcy protection will be subject to federal laws - with state mandates taking a legal back seat - is another "hold your breath" issue.

In "Tea Party Redux: State Pensions in Turmoil" by Susan Mangiero (, July 27, 2006), the question was asked whether taxpayers will "enough." With numerous headlines squarely focused on budget crises related to benefit plan funding, "enough" may not come soon enough for some.

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:

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.

"Death" Derivatives and Longevity Related Pension Risks

As seniors continue to live hopefully fulfilling lives, plan sponsors grapple with how to best manage the costs. The realities of longer life spans for participants is creating all sorts of innovation on Wall Street, including what Bloomberg journalists recently described as "death derivatives."

In a May 16, 2011 article, Oliver Suess, Carolyn Bandel and Kevin Crowley describe products that could encourage defined benefit plan executives to "outsource" by transferring risks to longevity traders or entering into a financial engineering transaction in order to receive a regular cash flow that mirrors their respective ongoing obligations to retirees. What happens next, depending on how capital market participants respond to a few test cases, could mean the growth of a $23 trillion market in longevity bonds and related derivative instruments.

As with any financial engineering endeavor, education will be paramount in terms of both plan sponsors and securitized pension obligation buyers understanding underlying assumptions and risk-return attributes.

Click to read "Death Derivatives Emerge From Pension Risks of Living Too Long."

Rethinking Work

I caught the last half hour of "Castaway" the other day on television. I've seen this 2000 morality tale several times. Directed by Robert Zemeckis and starring Tom Hanks, the plot is straightforward. A Federal Express executive survives a plane crash, only to find himself alone for four years except for the company of a sports ball he names Wilson. When he is finally saved, a reunion with his beloved girlfriend is bittersweet. Having reconciled herself to having lost the "love of her life," she has since married and become the mother of a baby girl. The film ends with the protagonist standing at the crossroads where four paths converge, deciding on his next move and feeling sad but hopeful about what tomorrow will bring.

As I read "Boomers Find 401(k) Plans Fall Short" by E.S. Browning (Wall Street Journal, February 19, 2011), I kept thinking how more and more people are finding themselves cast away on remote islands of life, having to figure out how to survive and overcome tough times. With the typical balance of "less than one-quarter of what is needed in that account to maintain" a "standard of living in retirement," it is no doubt a shock to countless individuals to discover that a trip down easy street won't come any time soon. Whether starting too late or saving too little or both, the net effect is the same. With rare exceptions, current monies are insufficient to support early retirement. To the contrary, working longer may soon become the new norm.

Like Tom Hanks whose rescued film persona looks to the future, learning from the past, attitude is everything. According to "'I'll work till I die': Older workers say no to retirement" by Jessica Dickler (, September 28, 2010), some individuals refuse to exit the labor force, even if they can afford to do so. Citing a study by Barclays Wealth, "nevertirees" choose to earn a living for as long as they can.

Tom Hanks is a fine actor but he too must be sensing a sea change in how people live their lives. Later this year, he plays Larry Crowne, a middle-aged man who "reinvents himself by going back to college" after losing his job. I've read that he also bought the movie rights to "How Starbucks Saved My Life: A Son of Privilege Learns to Live Like Everyone Else" by Michael Gates Gill. This former executive and now best-selling author says that "losing my job turned out to be a gift in disguise." See "Fired exec: 'Starbucks saved my life'" by Lola Ogunnaike, February 5, 2009.

As French entertainment legend Maurice Chevalier said, "Old age isn't so bad when you consider the alternative."

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.


Happy National Teach Children to Save Day

When my nephew was a little boy, he used to ask his mom (my sister) and dad about going to the grocery store to get money. What he wanted was a trip to the ATM machine (by the veggies counter). Type a few numbers and voila - lots of green things to buy toys. How amazing!

Alas, young men and women grow into adults who work, pay taxes and hopefully save for vacation, a new home and retirement. Unfortunately, mounting per capita debt makes it harder to plump the coin jar, regardless of discipline. According to Owen and Payne, we each owe $184,000. Ouch!

Looking on the bright side, getting started early is a good idea. Kudos to the ABA Education Foundation for creating National Teach Children to Save Day - April 21, 2009 this year. The goal is to teach youngsters about "four important money choices: SAVE, SPEND, DONATE and INVEST."

Kiddies - just remember. Too much government pork robs you little ones of enough disposable income to add to Mr. Piggy Bank (but that's a topic for another day).               

Money, Happiness and Governance

In case you missed it, April is National Humor Month. Created by "best-selling humorist Larry Wilde, Director of The Carmel Institute of Humor," 2009 marks the 33rd anniversary of this celebration of fun and merriment.

For those who live in Nebraska, they must really be rolling in the aisles. What? You didn't hear?

According to a survey conducted by, the home of Cliff Notes ranks top for its low number of foreclosures, low unemployment rate and low percentage of non-mortgage debt by income. Not surprisingly, Connecticut, where I call home, is number 28 out of 50 on the Happiness Index (not a good thing by the way). Being close to Wall Street, we are feeling the pinch of financial layoffs and plummeting portfolio values. California, Florida and Oregon rank 48, 49 and 50, respectively.

Along the lines of "feel good" action, I read an interesting article in the May 2009 issue of Reader's Digest in which Stanford University psychologist Carol Dweck advocates the benefits of failure. According to "How Failure Makes Us Stronger," psychology and neuroscience professor Antoine Bechara has identified two parts of the brain that are responsible for the "fear of failure" and the "lure of success." For certain individuals, the physiological response to failure is a chance to learn.

At a time when many professionals feel under siege for economic losses or sub-par performance or both, one silver lining may be new math, i.e. Failure = Second Chance.

Unfortunately, recent research suggests that not every one is ready to act anew. According to "Managers fail to control hazards" (April 6, 2009), Financial Times reporter Sophia Greene says "not so fast." Citing results of a new risk management study, certain factors such as liquidity risk have not yet "been built into risk models," possibly leaving portfolio managers (and therefore pensions, endowments and foundations) unduly exposed. In contrast, investors are described as committed to asking asset managers about risk management policies, with 10 pages of a typical Request for Proposal ("RFP") being dedicated to "risk of all sorts." In its press release, survey sponsor SimCorp describes "the lack of monitoring of strategic risk" as a concern, along with a less than robust commitment by senior management as reflected in its analysis. For an overview of other findings, read "Global survey reveals that risk function has lost status despite financial crisis" (April 1, 2009).

Recall that Pension Governance, LLC (now Pension Governance, Incorporated) and the Society of Actuaries discovered a similar lack of enthusiasm about risk management and fiduciary duties in its research. Click to access the 69-page study entitled "Pension Risk Management: Derivatives, Fiduciary Duty and Process" by Susan Mangiero. For an overview of that research, read "New Study Addresses Pension Risk Management Gaps" (October 13, 2008).

Can looking the other way make for a happy institutional investor or asset manager? Hopefully, the final answer is "no" and "open to improvement" wins the day.

April 1 Pension News - And That's No Fooling

Spring brings flowers, rain and April Fool's Day. Different from other topics, April 1 doesn't seem to be a laughing matter anywhere around the world when it comes to retirement issues.

  • The Pension Fund Regulatory and Development Authority in India sets April 1, 2009 as a date to expand pension plan products to citizens other than government workers. See "New pension scheme for MFs from April 1," Economic Times, March 18, 2009.
  • Contributions increase for British Columbia Public Service Pension Plan participants as of April 1, 2009. See "B.C. pension contribution increase set for April 1."
  • Russian pensioners saw contributions rise on April 1, 2008. See "Pensions to increase 250 rubles from April - minister 1," Russian News & Information Agency, March 26, 2007.
  • Certain Canadian pension liabilities will be valued differently after April 1, 2009. See "Determination and Transfer of Commuted Values," Office of the Superintendent - Pension Commission, Manitoba, February 2009.
  • National Football League retirement plan participants saw benefits drop, effective April 1, 2007. See "NFL Retirement Plan Amendment Reduces Pension Payout to Participants," RetiredPlayers.Org, March 31, 2008.
  • The Texas Pension Review Board meets on April 1, 2009. Click to read the agenda.
  • New UK tax laws permit expanded contributions for self-directed plans as of April 1, 2009. See "Pensions: 10 ways to boost your retirement income, Part 1" by John Lawson, Standard Life, March 26,2009.
  • New Jersey municipalities must pay at least half of their annual pension bill by April 1, 2009. See "Pension Bills to Surge Nationwide" by Craig Karmin, Wall Street Journal, March 16, 2009.

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?

New Study Addresses Pension Risk Management Gaps

 At a time of great market turmoil, plan participants, shareholders and taxpayers want to know whether their retirement plans are in good hands. Risk is truly a four-letter word unless plan sponsors can demonstrate that a comprehensive pension risk management program is in place. Unfortunately, there is little information that details if, and to what extent, plan sponsors are doing a credible and pro-active job of identifying, measuring and mitigating a variety of risks. The risk alphabet includes, but is not limited to, asset, operational, fiduciary, legal, accounting, longevity and service provider uncertainties.

While no one could have predicted the extreme volatility that characterizes the current state of global capital markets, it has always been known that poor risk management can make the difference between economic survival and failure. Applied to pension schemes, ineffective risk management could prevent individuals from retiring at a certain age and/or leaving the work force with much less than anticipated. Others pay the price too. Taxpayers worry about rate hikes that may be inevitable for grossly underfunded public plans. Shareholders could find themselves on the hook for corporate promises or experience depressed stock prices due to post-employment benefit obligations.

In an attempt to shed some light on this critical topic area, Pension Governance, LLC is pleased to make available a new research report that explores current pension risk management practices. In what is believed to be a unique large-scale assessment of pension risk practices since the publication of a 1998 study by Levich et al, this survey of 162 U.S. and Canadian plan sponsors seeks to: (1) understand why and how pension plans employ derivative instruments, if they are used at all (2) identify what plan sponsors are doing to address investment risk in the context of fiduciary responsibilities and (3) assess if and how plan sponsors vet the way in which their external money managers handle investment risk, including the valuation of instruments which do not trade in a ready market. The report was written by Dr. Susan Mangiero, AIFA, AVA, CFA, FRM, with funding from the Society of Actuaries.

Each survey-taker was asked to self-identify as a USER if he/she works for a plan that trades derivatives in its own name. A NON-USER works for a plan that does not trade derivatives directly but may nevertheless be exposed indirectly if any of the plan's asset managers trade derivatives.

In answering broad questions, a large number of surveyed plan sponsors describe themselves as doing all the right things to manage investment, fiduciary and liability risks. However, answers to subsequent questions - those that query further about risk procedures and policies at a detailed level - do not support the notion that pension risk management is being addressed on a comprehensive basis by all plans represented in the survey sample.

Key findings include the following points:

  • Plan size seems to be one factor that distinguishes USERS from NON-USERS, with 39% of USERS managing plans in excess of $5 billion versus 14% of NON-USERS associated with plans larger than $5 billion.
  • Pension decision-making appears to vary considerably by job function, with 48% (37%) of USERS (NON-USERS) choosing "Other" rather than selecting from given titles such as Actuary, Benefits Committee Member, CFO or Human Resources Officer.
  • Time allocation varies considerably with 64% (40%) of USERS (NON-USERS) saying they devote 75 to 100 percent of their work week on pension issues. In contrast, 37% of NON-USERS say they spend 0 to 24% of their work week on pension issues.
  • A majority of USERS (64%) and NON-USERS (48%) have had discussions about the concept of a fiduciary duty to hedge asset-related risks. A smaller number say they have discussed the concept of a fiduciary duty to hedge liability-related risks.
  • Few plans currently embrace an enterprise risk management approach with 59% (57%) of USERS (NON-USERS) responding that their organization does not use a risk budget. When asked if their organization has or is planning to hire a Chief Risk Officer, 57% (64%) of USERS (NON-USERS) answered "No."
  • NON-USERS cite numerous reasons for not using derivatives directly, including, but not limited to, "Lack of Fiduciary Understanding" (25%), "Perception of Excess Risk" (31%), "Considered Too Complex" (23%), "Prohibition Against Possible Leverage" (19%) and/or "Defined Benefit Plan Risk Not Considered Significant" (28%).
  • A query about whether survey-takers review external money managers' risk management policies results in 70% (58%) of USERS (NON-USERS) responding "Yes." Fifty-two percent (57%) of USERS (NON-USERS) say they review external money managers' valuation policies. This survey did not drill down with respect to the rigor of questions being asked.
  • Survey respondents seem to rely mainly on elementary tools to measure risk. Eighty-three percent (64%) of USERS (NON-USERS) rank Standard Deviation first in importance. Seventy-nine percent (63%) of USERS (NON-USERS) rank Correlation second. Only one-third (38%) of NON-USERS cite Stress Testing (Simulation). Four out of 10 USERS cite Value at Risk in contrast to 23% of NON-USERS who do the same.
  • Survey respondents worry about the future with 58% (60%) of USERS (NON-USERS) ranking "Accounting Impact" as a concern. Other concerns were also noted to include "Regulation," "Longevity of Plan Participants" and "Fiduciary Pressure."

Click to download the 69-page study, entitled "Pension Risk Management: Derivatives, Fiduciary Duty and Process" by Susan Mangiero. Given the large file size, readers are encouraged to (a) first save the file (right mouse click) and then (b) open the file from wherever you have saved the file. Otherwise, you may receive an error message, depending on your computer configuration. 

The study is also available by visiting Send an email to if you experience any difficulty in downloading the pdf file and/or want to comment about the study.

New Study Suggests That Few Are Ready to Retire

According to a new study, retiring at age 67 may not be in the cards for many individuals, partly by choice. Tracking desires and expectations of American workers, a newly created Sun Life Financial UnretirementSM Index suggests that 8 out of 10 persons want to continue working as a way to "stay mentally engaged." Other results are not surprising. Fewer than half of the respondents feel they can afford to stop working. One-third of survey-takers worry about the financial viability of Social Security. One coping mechanism, cited by 82 percent of the sample group, is to reduce their spending with about two-thirds of respondents saying they will lower their debt as a way to "improve retirement prospects" For more information about this attitudinal metric, click here.

Nice as it is to have choices about when to retire, the recent market rout makes it difficult at best for some to consider anything else but continued employment (assuming no layoffs by their employer). Yahoo! News references Congressional research that "Americans' retirement plans have lost as much as $2 trillion in the past 15 months." Making matters worse, economic conditions that result in lower wages make it difficult for some to keep saving for retirement, if they did so in the first place. Click to read "Retirement accounts have lost $2 trillion" by Julie Hirschfeld Davis, October 7, 2008.

In an interview with PBS, Peter Orszag, Director of the Congressional Budget Office, explains that "two-thirds of the assets that are in 401(k) plans are in stocks," exposing plan participants to fallout, just like institutional investors. He adds that economic problems are already impacting defined benefit plans. As the value of their asset portfolio drops, companies will need to "put in more money, and that will come out of either their shareholders, their workers, or they'll try to pass it along to their consumers." Click to read "Market Turmoil Puts Squeeze on Retirement Savings," October 9, 2008.

This blog has covered changing demographics and retirement angst for months. One can only hope that the current market malaise is short-lived and that individual savings goes up (or at least excess leverage goes down), to the extent that individuals can afford to put monies aside for post-employment consumption.

Make Every Day Count

I'd like to depart from the usual commentary about financial issues and devote this blog post to the celebration of people who err on the side of kindness and integrity, especially when faced with adverse circumstances. Putting a face on otherwise abstract notions makes a difference and so it is that I talk about computer science professor Randy Pausch.

In case you missed it, this Carnegie Mellon University favorite died a few days ago of pancreatic cancer, at the age of 47. His death was anticipated and highly publicized as part of  "The Last Lecture" or "Really Achieving Your Childhood Dreams." If you haven't seen it, I highly recommend at least one viewing. You can also buy the book version of The Last Lecture, co-authored by Pausch and Wall Street Journal reporter, Jeffrey Zaslow.

While I was originally interested in watching the video of this hour long talk because of the large amount of press it received, awe and inspiration took over as I saw Dr. Pausch interviewed on several television programs thereafter. Despite his pain and the tragic knowledge of an imminent demise, he always seemed upbeat and considerate. His sense of humor no doubt continues to help others cope with their loss of a son, father, husband, friend, colleague and "citizen of the world."

While Professor Pausch will be remembered by many, it is good to know that his optimism and courage are not unique. How many people have we met in our lives who have received "more than their fair share of problems" yet greet you with a smile or handshake? I thank my lucky stars for knowing such individuals.

So how does this relate to a pension blog? Well, for one thing, it's good to remember that money is only one of many currencies. While it's critical to have the financial wherewithal to retire comfortably, perhaps just as important is to possess the ability to enjoy the things that money cannot buy.

On a professional note, integrity and courage are paramount when we talk about solidifying the three-legged post-employment stool. At a time when fiduciaries are seldom applauded for their hard work, let's look for ways to improve the reward system for good players (and penalties for those who are sloppy or impervious to their duties). 

Though I acknowledge my propensity as a Cassandra (or Dr. No as some have suggested), I'm much happier helping folks put productive solutions in place. To those fiduciaries who share that view and work tirelessly on behalf of millions of individuals, bravo! Take a bow.

It's a Dog's Life - Literally...Puppy Pension Slashed. How is Your Nest Egg?

According to New York Post reporter Dareh Gregorian ("Screw the Pooch," June 16, 2008), Leona Helmsley's furry friend will have to make do with a paltry $2 million trust fund. Allegations that Helmsley may not have had full faculties when she wrote her will, and a single stroke of the pen by Manhattan Surrogate Judge Renee Roth, takes $10 million away from Trouble's nest egg. The remainder goes to the former hotelier's charitable foundation. For pet lovers, don't despair. Apparently, this still leaves ample money to cover her annual expenses of $190,000 for the expected remainder of his life (10 human years or 70 dog years). By the way, the lion's share of per annum costs go for security ($100,000) and guardian fees ($60,000). 

If you are a member of the baby boom generation (and the Federal Reserve Bank of St. Louis counts "79 million Americans born between 1946 and 1964" in this category - plus countless others outside the U.S.), $190,000 per year looks mighty good. With fewer and fewer workers to support national safety net programs, private savings and employer-provided benefits take center stage. Ask yourself this. How "retirement ready" are you? Will you be living in style or struggling to make ends meet? Check out this online retirement calculator, courtesy of the AARP (American Association of Retired Persons).

For pension fiduciaries, a critical question is whether (and to what extent) you have responsibility for empowering your workers to sufficiently fill the piggybank. Even in the absence of legal mandates, how does an organization attract and keep good workers when talent is in short supply around the world? According to a March 2008 survey, conducted by Deloitte Consulting and the International Society of Certified Employee Benefit Specialists, "A shortage of skilled and talented workers has become the most pressing concern among employers." Other worries include "the cost of providing retirement benefits to employees" and the appeal of company reward programs to "attract, motivate, and retain the talented employees" needed to "effectively run" an organization. Click to read the "2008 Top Five Total Rewards Priorities Survey."

If you are a taxpayer, you may be putting money aside for your personal rainy days at the same time that you pay taxes to help finance public pension programs (state, county, city). And if Social Security, Medicare and/or the Pension Benefit Guaranty Corporation needs a bail-out, who ya gonna call? Tax Busters (taxpayers)! 

According to then U.S. Comptroller General, David Walker, "A tsunami is building and ready to hit future generations, but this one won't be set off by earthquakes or other natural disasters. Instead, it will be a fiscal calamity created by the failure of government and business leaders to deal with the financial drain of millions of retiring baby boomers." (Walker now serves as President and CEO of the Peter G. Peterson Foundation.)

So Trouble may be literally living a dog's life but her retirement plan, albeit reduced, will keep the furball cozy. We could all be so fortunate!

New Research on 401(k) Plans and Amassing Wealth

As companies and government employers shed their traditional defined benefit ("DB") plan offerings, defined contribution schemes become absolutely and proportionally more important to individuals. In two new papers published by the National Bureau of Economic Research ("NEBR"), authors James Poterba, Steven Venti and David Wise conclude the following:

  • Self-directed retirement assets will outflank DB plans by 2010, "even though defined benefit plans remain the most important source of retirement assets for federal, state, and local employees."
  • The growth in self-directed retirement assets are influenced by a number of factors. These include (a) expected stock returns and bond yields (b) number of employees permitted to participate (not currently enrolled) and (c) asset allocation mix.

Citing data from the Survey of Income and Program Participation ("SIPP"), the research trio reveals that "only 5.8 percent of 44-yers old had 401(k)-type accounts" some 20 years ago. In 2003, that number had escalated to 44.3 percent. In 2000, per capita retirement assets for individuals about to exit the labor pool, and in their mid-60s, averaged nearly $30,000. A decade from now, available assets are projected to rise to $90,000 (in terms of year 2000 dollars). In 2040, the prediction is that nest eggs will topple $269,000.

Click here to order "Rise of 401(K) Plans, Lifetime Earnings, and Wealth at Retirement" (NBER Working Paper 13091) and "New Estimates of the Future Path of 401(K) Assets" (NBER Working Paper 13083).

Wall Street Journal reporter Jennifer Levitz offers a competing, albeit grim, reality. In "Americans Delay Retirement As Housing, Stocks Swoon," she writes that graying Americans favor longer work lives for a variety of reasons. Preservation of health benefits is one factor. Sagging equity returns in 2000-2002 didn't help, especially for those employees who had allocated a big chunk of their savings to stocks. Of course, no trend exists in isolation. A delay in retirement means younger workers will face more competition for promotions or even jobs though the impact is uneven across industries. Skilled workers are nearly always welcome, being indispensable for many knowledge-oriented businesses. Though written on April 1, her description of a brave new world is no April Fool's joke. Companies are fast being forced to reckon with changing demographics and altered employment patterns.

As a colleague aptly bemoans, the retirement trifecta (Social Security, juicy defined benefit plan payouts and hefty salaries, let alone a job) is a fantasy for most everyone still in the work force. For those who expect to live as well as your grandparents or parents, good luck. Start pinching those pennies hard and often.

House Approves Say on Pay - What About Pension Empowerment?

Hot off the press, the U.S. House of Representatives says okay to amending the Securities Exchange Act of 1934 to provide stockholders more power in approving executive pay. Click here to read the Shareholder Vote on Executive Compensation Act. Arguably the rationale is to empower shareholders to veto executive pay packages deemed "excessive." One can argue about the efficacy of the legislation (and likely will). However, it begs an interesting question for citizens of pension land.

What type of say do they get about the operation of a defined contribution and/or defined benefit plan? How can they corral perceived conflicts of interest, alleged misdeeds and/or questionable decisions? On the flip side, how can they say "bravo" to effective investment stewards, perhaps voting for better financial rewards and job title recognition for good do bees (honest players)?

The answer - Not much!

This topic arose in 2005 when I was asked to appear on CNN Financial to talk about United Airlines. The anchor asked me to cite steps that defined benefit plan participants could take when they know a company is encountering financial difficulties and want to exit the plan or change their share of the investment mix. When I explained to the producer that employees are extremely limited in being able to exert influence over the management of the trust (other than through litigation, and only after losses have occurred), we all agreed that a gloomy message may not make for great ratings.

Sob - my fifteen seconds of fame, evaporated in a moment of candor.

So now that Congress is taking steps to empower shareholders, why not tackle the same for plan participants? Yes, post-Enron, reforms were made. No, to this day, plan participants still have little influence on whether a plan is well run or not.

Part of the problem arises because information is scattered, often obtuse when available and sometimes contradictory (depending on the source). And for those on the outside looking in, access to documents such as the Summary Plan Description (SPD) is nil.

Just an aside - This issue of limited beneficiary control extends to defined contribution plans as well.

Hence, plan participants MUST depend on the integrity, knowledge, experience and solid intentions of the persons in charge.

So to all of those plan beneficiaries everywhere - ask yourself this. How much do you know about the people in charge? Would you like to know more?

To plan stewards - If you aren't providing transparency about everyone with authority to make decisions about plan design and investment governance, wouldn't it be a good idea to do so? Besides creating a sense of "I don't want to hide anything," you open the door to suggestions for improvement and possibly close a door to litigation or otherwise unwanted scrutiny.

Why wait?
Continue Reading...